Vol. 389 No. 4
asked the Minister for Finance, in relation to the cost of living index, if his attention has been drawn to the fact that the rate of increase has risen in recent months; the underlying annual rate of increase; whether he has had consultations with the Central Bank in relation to measures to reduce the rate of inflation; and if he will make a statement on the matter.
9.
(Limerick East) asked the Minister for Finance if it is still his view that the increase in consumer prices this year will not be appreciably different from the end 1988 rate of 2¾ per cent, as he stated in his financial statement on 25 January 1989; if not, the underlying economic factors which have caused this change of view; if he will make a statment on the dangers of inflation as he sees them; and the action the Government intend taking to keep prices down.
I propose to take Question Nos. 8 and 9, together.
I am aware that the most recent official data relating to mid-February last show a year-on-year increase in consumer prices of 3.3 per cent, whereas the corresponding figure at mid-November 1988 was 2.7 per cent.
At budget time there was the reasonable expectation that the annual average inflation rate in 1989 would, again, be less than 3 per cent. This forecast was based on the available assessments of price prospects internationally, and on the usual assumptions of unchanged exchange rates, interest rates and international oil prices. Since the budget, the publication of the mid-February figures and international developments, notably, stronger than expected inflation in our trading partners, the sharp rise in oil prices and the recent increase in German interest rates, point to the annual inflation rate being higher this year — probably in the region of 3.5 per cent.
If prices rise faster because of international events, outside the control of this economy, this is something we have to live with but, of course, we must not compound these effects by our own actions. A higher international inflation trend need not undo the achievement of retaining the inflation rate below the average of our trading partners. This is what matters for our trade performance, our growth prospects and, ultimately, for a continuation of the recovery in employment. The key to success in this regard, I would stress, is moderation in domestic costs and charges; in that context I would remind the House that, in sharp contrast to the previous years, taxation policy under this Government, to the extent that prudent budgetary policy allowed, has underpinned low inflation.
The concern I have voiced about the latest figures relates to the position that of the rise in prices in the February 1989 quarter — 1 per cent, leaving aside non-recurring budget effects — a significant proportion seems to have been due to factors within this economy. Some of these were once-off, but the underlying figure was at the high end of last year's quarterly changes. If this trend were to continue, or if more buoyant economic conditions and external price stimuli were to be exploited to increase profits or pay, the improvement in our competitive position would be jeopardised and we would all end up worse off.
This Government's attitude to inflation is clear and unequivocal. Having got inflation down to very low levels, we are determined to keep it there. This is why we have stressed the need for vigilance throughout the community in relation to prices.
The Government have not had consultations with the Central Bank on the general question of inflation.
Would the Minister agree that the November to February figure, the last quarterly inflation figure, showed an increase in the cost of living of 1.3 per cent which taken by itself, suggests that if it were to be repeated quarter after quarter it would lead to a rate of inflation in excess of 5 per cent by end year? Would he agree with me that, in the intervening quarter — because of the factors he has mentioned and others — there is no reason to believe that the next quarter's inflation rate will be any lower? Therefore, would he agree that the projected figure of 3.5 per cent he has mentioned is conservative to the point of being economical with truth? Furthermore would he agree that an objective outsider would predict an inflation rate of between 4 per cent and 5 per cent on present performance?
I would prefer to be economical so far as the inflation figure is concerned rather than in relation to the truth. As I have said, it is projected to be in the region of 3.5 per cent. The most pessimistic forecast at present is of a rate of inflation of 4 per cent at the end of the year. The Deputy's computation of simply multiplying 1.3 per cent by 4 is not one with which I would agree. I should say that some factors influencing the quarter from November to February were non-recurring. The most influential factor in that quarter was the increase in the price of drink which contributed approximately .04 of 1 per cent. There were also increases in the price of milk and food of approximately 3.3 per cent. There were other aspects, such as services, but the most worrying feature was that it was all domestic-induced inflation.
As the Deputy would be the first to admit, forecasting in this area is an inexact science. For example, it is very difficult to predict what oil prices will do for the remainder of the year. My view is that oil prices will tail down again in the second half of this year. For example, the most recent figures with regard to manufacturing prices are less than those contained in the previous report on manufacturing price increases. The most pessimistic forecast of the inflation rate of which I am aware is 4 per cent. We are saying it will be of the order of 3.5 per cent. Indeed, we will take any necessary action in an endeavour to keep inflation as low as possible.
(Limerick East): In view of the fact that a 25p increase in the price of a gallon of petrol will increase the consumer price index by approximately 1 per cent and a 1 per cent increase on interest charges — in the pipeline — would increase the consumer price index by 0.2 of 1 per cent, is not a projected inflation figure of 3.5 per cent at the end of the year very conservative indeed? Would not a rate of 4.5 per cent be more realistic?
No, I do not accept that a figure of 4.5 per cent would be more realistic. In fact, I should say that some of the figures the Deputy has just thrown out do not stand up. First, if there were to be an increase of 25p on the price of a gallon of petrol, and it were to be followed through to the end of the year, that would add 0.4 per cent, not 1 per cent to the rate of inflation. I have seen the hype in the newspapers about a 25p to 30p a gallon increase which is typical of what always takes place in advance of any price increase. I do not accept that the increase should be of that order and it would have to be carried through for the full year to add 0.4 per cent——
(Limerick East): The 0.4 per cent is the half-year figure. The full year figure would be 0.8 per cent.
I have said already I believe that oil prices will tail down in the second half of this year. The Deputy should read the projections of the oil industry and those of the international oil market. If he does not do so I cannot help him but I happen to follow them fairly closely.
(Limerick East): The Minister thought they were going down on the evening of the budget but he was proved to be wrong.
I did not. That was my view in February when the change took place, not in January. What is most important is that we hold our relative competitive position vis-à-vis inflation. As the House is aware, the British inflation rate is approximately 8 per cent and heading above that figure. We want to hold our relative position. We intend to do that and maintain our competitive position.
Is it the case that on Tuesday, 16 May, the CPI will be calculated for the present quarter? Would the Minister agree that, in order to get a fair view of where inflation is now going, any price increase in petrol now being negotiated between the Minister for Industry and Commerce and the petrol companies should fairly be implemented before that day, otherwise the Government might be accused of rigging inflation statistics if they delay or temporise on the implementation of any increase?
I can assure the Deputy that he will not be given an opportunity good, bad or indifferent of accusing me of trying to rig the CPI. I should tell him that the price increases review takes place on the fifth day of every month and 5 May is a long way off from 16 May. I have read his most recent public statements in that regard, and interesting facetious suggestion, but I have no intention of following it through.
(Limerick East): Could the Minister inform the House what other price increases, apart from that of petrol, he is endeavouring to defer to the back end of May, or indeed until after 15 June?
I am not trying to put back any price increases good, bad or indifferent. As the Deputy is aware, the Minister for Finance does not have statutory responsibility for price increases. Rather is it the responsibility of my colleague, the Minister for Industry and Commerce, who, I am sure, will maintain a vigilant eye on price increases, especially those that would appear to us to be unjustified.
