Substantial progress has been made in improving Ireland's competitiveness in recent years. The real Harmonised Competitiveness Indicator (HCI) measures the trade weighted exchange rate for Ireland, adjusted for relative price developments in trading partners. From mid-2008 to end-2013 Ireland's real HCI fell by 15 per cent, indicating a significant improvement in competitiveness over the period and leaves Irish-based firms better equipped to compete internationally.
In addition, relatively low consumer price inflation over the last five years has meant that Irish price levels have converged considerably toward the euro area. For instance, annual HICP inflation in Ireland has been below that of the euro area average for every year since 2009. This trend has continued this year, with inflation for each of the first four months of this year coming in below the comparable rate in the euro area.
With the US and the UK being Ireland's biggest trading partners outside the euro area, fluctuations in the value of the euro against the US dollar and Sterling have a particular impact on Ireland's competitiveness. However, policy measures in these trading partners, such as those that stimulate domestic demand, can have the effect of depressing their currencies which in turn can prove positive for Ireland, often outweighing any competiveness losses.
My Department expects inflationary pressure to remain relatively muted this year with the recovery in domestic demand unlikely to result in the emergency of any significant domestic price pressures given the amount of spare capacity in the economy.
In terms of the GDP deflator, which accounts for price changes in all components of demand and so is the broadest measure of price developments in the economy, my Department is projecting an increase of 0.5 per cent this year. This reflects that the terms of trade effect is expected to be negative this year due partly to recent exchange rate developments.