Michael Finucane
Question:14 Mr. Finucane asked the Minister for Finance his views on the rising inflation trend in the economy; and if he will make a statement on the matter. [22521/99]
Other Questions. - Price Inflation.
The consumer price index for September showed a headline inflation rate of 1.5 per cent compared with 1.4 per cent for the previous month. The year on year increase in the harmonised index of consumer prices was 2.6 per cent in September compared with 2.4 per cent in August. The most significant price changes in the year to September were increases in services and related expenditure, plus 5.2 per cent, transport, plus 4.7 per cent, fuel and light, plus 4.1 per cent, alcoholic drinks, plus 3.7 per cent, tobacco, plus 3.2 per cent and food, plus 2.7 per cent, and decreases in housing, minus 14.1 per cent and clothing and footwear, minus 7.3 per cent.
The inflation outlook will be influenced by a number of factors. On the negative side, inflation in the services sector is now running at more than 5 per cent on a year to year basis. Given the strength of the economy, a significant reduction in services inflation seems unlikely in the short run. International commodity prices are also now increasing. These have added to the CPI since March with further increases likely in the months ahead. The headline CPI will rise over the next few months as the large falls in mortgage rates at the end of 1998 begin to fall out of the year on year comparison.
The recent increase in interest rates by the European Central Bank will also add to inflation. The extent of this effect will be determined by competitive developments in the mortgage market which are difficult to gauge at this stage. There are also a number of positive developments affecting the CPI. Food price inflation is falling after the large increases at the end of 1998 resulting from supply related problems. In addition, the recent appreciation of the euro should help to dampen any prospective increases.
As I have mentioned on several occasions, the Government is concerned about underlying price developments and excessive growth in domestic demand. Given the new policy framework in Economic and Monetary Union, budgetary policy has an enhanced role to play in stabilising demand. This calls for a prudent approach to budgetary policy which involves running significant budgetary surpluses in buoyant economic conditions. I intend to continue with this policy in the forthcoming budget.
Pay developments are also crucial in ensuring low inflation. The Government is committed to working towards a new partnership agreement which would support appropriate pay increases having regard to the overall needs of the economy.
Does the Minister consider control of inflation to be an objective or an instrument of policy?
It is the objective of all economic policy to control inflation. Low inflation in recent years has contributed greatly to our economic success. Both the Deputy and I remember the times when inflation was in double digits and we followed it up with double digit wage increases which led to rising unemployment, higher taxes and a decrease in people's take home pay. In the 12 years since, we have had moderate wage increases, tax reductions, low inflation, record employment growth, falling unemployment and the elimination of the current budget deficit and the Exchequer borrowing requirement and we now have surpluses. We have also been able to increase the level of services to everyone. Keeping inflation under control is one of the primary objectives of this Government because we have seen the benefits of doing that and we remember the times when we did not.
Does the Minister agree the relatively depressed import prices in the past year or 18 months have helped us considerably to keep the domestic inflation rate down?
Yes.
Does he also agree that there are indications that domestic demand is beginning to push prices up and that there is considerable cause for concern? If so, what measures does he intend to take to dampen down domestic demand? Is he committed to the stability programme he published on budget day last year which committed him to indicative tax cuts of just £350 million in this year's budget?
The forecast annual inflation rate for 1999 was originally 1.8 per cent. That figure has been revised downwards to 1.6 per cent. That is our best estimate of inflation for 1999. In my budget speech on 1 December, I will outline the general inflation rate for next year.
In my reply I have given the breakdown of inflation in the recent past and the areas that contribute to pushing up inflation, which are mainly services. I have also given the factors that are bringing down inflation. The CPI headline figures would be much higher were it not for the relatively large increases in mortgage repayments over the past 12 months. Food price inflation has been relatively low due to international factors. On the other hand, the strength of the Irish economy has pushed up services related expenditure and that is highlighted in the areas to which I referred in my reply.
To return to my supplementary question, is the Minister aware that the primary objective of policy as enunciated by Mr. Greenspan of the US Federal Reserve who has been successful in growing the American economy, is to continue with sustainable growth? Mr. Greenspan considers the control of inflation as an instrument in achieving that objective rather than an end in itself. Does the Minister agree that the mission statement of the European Central Bank declares the control and stability of prices to be its primary concern?
Yes.
Will he consider enunciating the American view at the next meeting of ECOFIN lest the EU reduce growth unnecessarily by increasing interest rates?
The primary objective of the European Central Bank, as Deputy Noonan has outlined, is the maintenance of price stability.