Vol. 472 No. 8
1 Mr. McCreevy asked the Minister for Finance the way in which the Irish inflation rate is calculated and the basket of goods used for such a calculation; his views on whether the inflation rate is accurate, underestimated or overestimated; the anticipated level of inflation for 1997; the effect, if any, such a level will have on the economic and monetary union criteria; and if he will make a statement on the matter. [24276/96]
The Minister for Finance sends his apologies. He is attending an ECOFIN meeting.
The consumer price index, which is compiled and published by the Central Statistics Office, is the standard measure of Irish inflation. The purpose of the index is to measure the cost of purchasing a constant representative basket of consumer goods and services. Identical products are priced in the same retail outlets on the occasion of each price survey, so that changes in the cost of this constant basket reflect only price changes.
The fixed quantity or weight of each item in the CPI basket is proportional to the average amount purchased by all private households. The fixed quantities or weights are retained for as long as they are considered representative of current household purchasing patterns. These weights are determined by large-scale household budget surveys.
The most recent such survey took place in 1994. Its results are being incorporated into the new consumer price index series, the base period for which will be November 1996. To date the CPI weights have been revised every seven years. However, it is intended they will be revised every five years from 1994.
As the CPI is a price index it does not take into account substitution patterns, income levels, market conditions, income tax or social insurance.
The current CPI series, which is based from November 1989, prices 495 varieties of consumer purchases. Four surveys are held each year in the months of February, May, August and November. Approximately 36,000 prices are collected at each survey from retail outlets in 82 cities and towns around the country by approximately 200 field staff. In addition, 102 direct or postal surveys are conducted to collect central prices, such as utility charges. From January 1997, the CPI will be surveyed on a monthly, rather than a quarterly basis, and will be re-based to November 1996. Under this new series, 560 varieties will be priced, with about 45,000 prices being collected each month.
The Central Statistics Office is an independent statutory body under the aegis of the Department of the Taoiseach. Its statistics are compiled using best practice as determined by qualified statisticians. It is considered that the CSO's measurement of the CPI is accurate, and it does not overestimate or underestimate inflation.
Inflation in 1997 is expected to average a little over 2 per cent. However, this must remain a provisional assessment pending consideration of the CPI figures for November 1996, issued today by the CSO, and pending also the conclusion of work on drawing up of the macroeconomic forecasts which will be announced at the time of the budget.
A satisfactory inflation performance in 1997 is required for entry to Economic and Monetary Union. At present inflation for comparative purposes across the EU is measured, not by the CPI, but by the interim index of consumer prices. The IICP differs from the CPI by excluding certain CPI items, including mortgage interest payments, car insurance, road tax, foreign holidays and most health and education services. The items thus excluded together account for about 15 per cent of the weight of the CPI.
As its name suggests, the IICP is an interim measure pending full regulatory agreement at EU level in 1997 on a successor index, to be known as the harmonised index of consumer prices. In practice the HICP is not expected to differ a great deal from the IICP. It is considered that the continued low inflation which is envisaged for Ireland in 1997 will enable us to meet the economic and monetary union inflation criterion. There can, however, be no room for complacency in this regard and vigilance must be maintained in relation to inflation.
I thank the Minister for Equality and Law Reform for taking the Minister for Finance's questions. I know he will be a more than able substitute.
I have a number of supplementary questions arising from his reply. I thank him for the detail on how the CPI is calculated but one of the purposes of tabling this question was to ascertain when the weighting of the basket of goods was last changed because a recent report from the US proved that the US inflation rate has been calculated inaccurately for at least a decade. According to the report, the main reason for the inaccurate calculation was the official measure did not properly reflect changes in quality when new produce replaced older goods, nor did it take account of changing consumer spending patterns when relative prices changed. I understand from the Minister's reply this weighting is changed every seven years and the CSO is currently working on the 1989 weightings. Is it intended that we will not need to wait seven years now to change the weighting given to the basket of goods because it is important that the rate of inflation is calculated accurately?
I am aware of the reports from the US to which Deputy McCreevy refers. Measurement of inflation is not a cut and dried matter, but it has given rise to a good deal of debate on methodology for many years past. I do not propose to go into the detailed statistical issues around which this debate revolves. These are primarily within the competence of the CSO.
I have already expressed confidence that the Irish CPI is an accurate measure of Irish inflation. This confidence is grounded on the statistical expertise of the CSO, which is an independent statutory body under the aegis of the Department of the Taoiseach.
It is also relevant to note here that the measurement of inflation in all EU member states for economic and monetary union assessment purposes will be carried out on a methodologically comparable basis across all member states when the HICP is in place next year.
Regarding the weighting to which Deputy McCreevy referred in his supplementary, that is being improved because from now on it will be revised every five years from 1994 instead of every seven years and that is obviously an appreciable improvement.
Another part of my question related to the anticipated level of inflation for 1997. Today's announcement of the year-on-year inflation rate to November shows a somewhat marked increase in inflation of 1.9 per cent. Furthermore, yesterday's winter report of the Central Bank cautions against an expansionary fiscal policy and states that the danger of inflation may be exacerbated and there may also be a danger of an interest rate rise. Will the Minister agree that the Estimates announced this week, which show a very high increase in the day to day Government spending for 1997, go against the cautions expressed by the Central Bank and give us some cause to worry about the inflation rate for next year?
No, I do not agree.
I did not think the Minister would agree.
The Estimates represent a balanced and prudent response to the challenge of reconciling increased provision for vital social services with real improvements in the income of workers while at the same time preserving the sound state of the public finances. The Minister for Finance considers that the Estimates do not jeopardise the continuation of low inflation here next year. Deputy McCreevy, in talking about an increase in the inflation rate, does not have his figures quite right. The inflation rate for 1994 was 2.4 per cent and 2.5 per cent for 1995. The trend is towards a reduction rather than an increase, which is the result of sound and prudent Government policies and financing.
I do not wish to correct the Minister, but the inflation rate to November announced today is 1.9 per cent year on year which is an increase on the year on year increase to August last. The graph is going up. Will the Minister agree that Estimates published this week are in direct contradiction to the cautions expressed by the Central Bank in its report issued yesterday and the inevitable outcome is that the Estimates will lead to an increase in interest rates in the very near future?
I am not aware of that statement, but I do not necessarily accept that view. The Estimates are prudently construed with various social, employment and expansion objectives in mind. We must wait and see what the budget will provide because it will be a key factor in determining the rate of inflation. The year on year inflation rate for 1994 was 2.4 per cent, 2.5 per cent for 1995 and 1.9 per cent for this year. That represents an appreciable reduction and is welcome.
