Dáil Éireann díospóireacht -
Wednesday, 14 Oct 1998

Vol. 495 No. 2

Written Answers. - Price Inflation.

Ruairí Quinn

Ceist:

68 Mr. Quinn asked the Minister for Finance his views on the fact that recent increases in the consumer price index appear to reflect domestic demand rather than international prices; and if he will make a statement on the matter. [19499/98]

Seymour Crawford

Ceist:

94 Mr. Crawford asked the Minister for Finance his Department's estimate of inflation as measured in the CPI for the next three years; the dangers, if any, he foresees for the economy as a result of rising inflation; and if he will make a statement on the matter. [19599/98]

Minister for Finance (Mr. McCreevy)

I propose to take Questions Nos. 68 and 94 together.

There is a broad range of evidence that consumer price inflation in Ireland as a small, highly open economy is primarily determined by international inflationary trends and also by exchange rate developments. Excessive growth in domestic demand would be expected to impact mainly on the economy's balance of payments position through increased imports rather than in inflation. Hence, the upturn in CPI inflation in the course of 1998 is largely attributable to the strength of the currencies of Ireland's main trading partners in the course of 1997 as measured by the effective (trade-weighted) exchange rate (EER). This has been manifested directly in exchange rate sensitive traded goods but would also be expected to impact indirectly on non-traded goods and services prices in the economy reflecting the spillover from price increases in traded good inputs. Recent movements in the EER should reduce upward pressure on prices.

Recent data does not prove that domestic demand is primarily responsible for recent price increases. There is some evidence that prices of services and some other home-produced items may be increasing faster than the average and this will have to be kept under review. The annual increase in the Consumer Price Index in September last was 3 per cent. My Department's latest inflation forecast published in Economic Review and Outlook (ERO) in July last was for an annual increase of 2.75 per cent for 1998 as a whole. I will be updating this forecast for 1998 and setting out a projection for 1999 to 2001 in my budget on 2 December next.

It is vital that we maintain the low inflation conditions achieved in recent years. Wage moderation linked to reductions in taxes played a major role in achieving low inflation. This has been a key feature in securing the competitiveness of the Irish economy, expanding employment and improving living standards generally.

As previously indicated, the 1999 budget will have as its primary objective the maintenance of low inflation and competitiveness. In current conditions of very strong growth in consumer spending and concern about inflationary pressures, it is essential that the budget does not add significantly to domestic demand.