Michael Noonan
Question:46 Mr. Noonan asked the Minister for Finance his views on rising inflation; and if he will make a statement on the matter. [26930/99]
Written Answers. - Inflation Rates.
So far this year headline inflation, CPI, has been in the range 1.2-1.6%. However, this understates underlying inflationary pressures in the economy because the headline rate has been depressed by mortgage interest rate cuts since late 1998. Excluding mortgage interest rates, the average inflation rate this year has been 2.6%. As the mortgage interest rate reductions in late 1998 and early 1999 drop out of the year-on-year comparison, the headline rate can be expected to rise significantly and to converge towards the underlying rate. Headline inflation is expected to be in the region of 3.5% in the early months of 2000.
The increase in excise on tobacco products in the budget will add approximately 0.75% to the headline inflation rate for 2000. This measure is part of the Government's strategy to encourage people to cut down or give up smoking and so reduce the incidence of tobacco related illnesses.
Transport and fuel and light costs have risen substantially since March reflecting the doubling in crude oil prices resulting from supply cuts by OPEC and the fall in the euro against the US dollar. However, inflation is forecast to moderate in the second half of next year for a number of reasons – the distorting effects of mortgage interest rate changes will become less important, oil prices appear to have peaked and food prices are expected to continue their recent fall in response to improved supply conditions. The impetus to prices of the euro's decline this year will also fall out of the calculations. As a result the headline rate is forecast to fall to about 2.5% in the second half of 2000, resulting in an annual average of about 3% for the year. The pace of price increases should continue to abate thereafter. Ireland's updated Stability Programme 2000-2002 projects average inflation of 2.25% for 2001 and 2% for 2002.
As a small open economy, inflation in Ireland is to a greater extent than elsewhere externally determined. However, domestic inflationary pressures, particularly in the services and construction sectors, remain a cause for concern. It is essential that domestic cost increases be kept to a minimum, both to enhance the value of incomes increases and to maintain Ireland's competitiveness and growth potential.