Jim Mitchell
Question:4 Mr. J. Mitchell asked the Minister for Finance his expectation for inflation in 2001. [19110/01]
Ceisteanna–Questions. Priority Questions. - Inflation Rate.
The most recently published inflation figures for May show an annual increase of 5.4%. This is down from a high of 7% last November and 5.6% in April. On the EU harmonised index of consumer prices, inflation stood at 4.1% in May down from 6% last November and 4.3% in April. The main contributors to the annual increase in prices in May were food and housing which combined to contribute 3.2% of the 5.4% increase in the consumer price index. In May, three other Eurozone member states had inflation rates higher than Ireland.
At budget time, my Department forecast an average inflation rate as measured by the consumer price index of 4.5% this year. Other commentators, such as the ESRI and the Central Bank, have more recently forecast annual average inflation rates of 4.2% and 4.75% respectively in 2001.
I still expect inflation to decline further over the second half of the year as the influence of external factors such as the oil price increase and the fall in the euro, which pushed up inflation last year, subsides. My Department will issue a revised inflation forecast with the publication of its economic review and outlook later this summer.
We must all be vigilant in relation to the upward pressure on inflation from unfavourable wage trends. Strict adherence to the terms of the Programme for Prosperity and Fairness is the best way to ensure wage developments do not discourage direct investment and endanger our competitiveness.
The Central Bank is talking about a possible 5% out-turn for this year. That is twice what the Minister found when he came into office four years ago. Will he agree that the high rate of inflation is directly attributable to his policies and that the European Union criticisms of his policies are now well founded?
I do not accept that my policies contributed to inflation. Most commentators would give the reasons for the increase in inflation in 2000 as factors totally outside of our control, excluding the tobacco price index which I initiated for good health policy reasons. The other determinants were the weak euro and the higher price of oil and oil-related products, which pushed up inflation in 2000. For the first few months of this year the main contributor to inflation was the unexpected rise in food prices which rose sharply as a result of foot and mouth disease. Food prices have risen by 7% in the 12 months to May. Food accounts for approximately 23% of the consumer price index.
Ireland is no longer top of the league on the EU harmonised index of consumer prices. The last public figures show the EU harmonised index at 3.4%. Ireland is at 4.1%. That is not much consolation but the other countries, particularly Germany, are experiencing an upsurge in inflation for more or less the same reasons.
Will the Minister not accept that when he became Minister for Finance, our inflation rate was one of the lowest in the European Union and now it is one of the highest? Will he not accept responsibility for that dramatic change?
In the year and a half before we joined the euro on 1 January 1999, the Deputy might remember that there were five Maastricht criteria which had to be met to satisfy the conditions. One of the most commonly known is that the rate of debt to GDP must be approaching 60%, but there was an inflation criterion also to the effect that we could not be more than 1.5% below the average of the three lowest countries. Ireland was actually the lowest of the three lowest countries and all other countries were measured against us. Therefore, if I want to take the credit for inflation between June 1997 to the end—
That is what the Minister inherited from us.
Please allow the Minister to reply.
No. Eighteen months after I came into office the graph continued downwards, but I did not claim credit for it then because I have long been of the view, in opposition as well as government, that the main determinants of inflation – Ireland being a small, open economy – are largely outside our control, and I have held to that position. As I explained, in the middle of the year we will publish our revised estimate on inflation. I pointed out in my reply that the ESRI reported recently and expected the average to be 4.2%. The Central Bank reported in recent days and stated the average might be 4.75%. We will publish our figures in the middle of the year.
The Minister denies, therefore, that there is any truth in the criticism by the European Union that his policies are expansionary and inflationary, and that he has nothing whatever to do with the doubling of the rate of inflation in the past three or four years. He inherited the lowest rate of inflation in the European Union when he became Minister and now we have one of the highest. Will he not accept even part of the responsibility for that? Will he not accept that his inflation policies, like his housing policies, are a disaster?
I was directly responsible for one element of inflation in recent years, the 50p increase in a packet of 20 cigarettes I imposed in the budget of two years ago. That contributed about 0.8% to the headline CPI figure—
That is gone from the system.
—for the following 12 months, but in the same way that I did not claim credit when it was coming down, I do not accept responsibility for it going up. Most commentators here would accept that the main determinants for inflation are as I have outlined for a number of years. They are largely outside our control. Fiscal policy, both now and previously, has a very limited effect on inflation. As I pointed out in this House on many occasions, if one were to take £3 billion or £4 billion out of the economy, either in expenditure reductions or taxation increases, it might have a small effect on inflation. Someone recently did the sum and it might mean 0.5% after about two and a half years, which no one is advocating.