Vol. 507 No. 1
5 Mr. Deenihan asked the Minister for Finance his views on the recent rise in inflation; his further views on whether the continuing weakness of the euro will further fuel inflation; and if he will make a statement on the matter. [16117/99]
The consumer price index, CPI, for May showed an inflation rate of 1.5 per cent compared with 1.4 per cent for the previous month. Excluding mortgage interest effects, inflation rose to 2.6 per cent in May from 2.3 per cent in April. The year-on-year increase in the Harmonised Index of Consumer Prices stood at 2.3 per cent in May compared with 2 per cent in April. The most notable price changes in the year to May were in services and related expenditure at +4.3 per cent, food at +3.1 per cent, tobacco at +3.3 per cent, housing at 10.7 per cent and clothing and footwear at 6.5 per cent.
Reflecting the recent rise in international oil prices and changes in the euro/dollar exchange rate, transport at +0.9 per cent and light and fuel at +0.6 per cent showed large monthly increases in May. Alcoholic drinks showed a monthly increase of +1.5 per cent, reflecting a recent general rise in prices.
Prospects for the rest of the year are dependent on a number of factors. On the negative side, inflation in the services sector is running at over 4 per cent on a year-on-year basis. This is a cause for concern and indicates the existence of domestic inflationary pressures. International commodity prices, which have been very low until recently, are also increasing modestly with the prospect of further increases in the months ahead. In addition, as the large falls in mortgage rates at the end of last year fall out of the year-on-year comparison, this will see the headline CPI increase towards the end of the year.
On the positive side food prices should put downward pressure on the CPI. Last autumn, food prices rose sharply reflecting supply problems. These price increases are unlikely to be repeated this year. Since the beginning of the year, the euro has fallen by about 7.6 per cent against sterling and by 11.3 per cent against the dollar. Although not strongly in evidence to date, imported inflation could become a factor if the present parities were sustained, in view of Ireland's substantial dependence on international trade. The degree to which this might occur is, of course, critically dependent on the pricing response of UK suppliers, in particular, to the evolution of the euro/sterling parity. Overall, it is forecast that the CPI will increase over the course of the year but the average for the year as a whole is likely to be lower than the budget day forecast of 2 per cent.
Does the Minister agree that an exchange rate of below 82p sterling over a sustained period will inevitably lead to inflationary pressures here? Will he express any concern in regard to the weakness of the euro from the point of view of international perception? Will he confirm whether discussions have taken place at meetings of European Finance Ministers on the weakness of the euro? Has its weakness given rise to any concern to date among our EU partners?
The Deputy will be aware that this matter was discussed at length in advance of the introduction of the euro on 1 January 1999, particularly at the end of 1997 and early 1998 when some commentators forecast that Irish inflation would reach extraordinary levels. Suffice to say that the forecast outlined by the Department of Finance was correct, not that advanced in the outlandish headlines of some commentators.
During that debate, I recognised that the critical determinant of Irish inflation has always been the relationship between the Irish pound and sterling. The Deputy is correct in saying that a high sterling value over a period would affect prices, given our trade with the UK. However, that would depend on the volume of imports from the UK, in addition to the pricing mechanisms used by UK suppliers and their Irish importers.
The Deputy asked about the value of the euro. I was somewhat criticised within this House, but praised outside of it in the longer term, for my failure to comment on the Irish pound exchange rate when the Irish pound floated freely. My approach was referred to as the ‘button-lipped approach'. Some of my European counterparts might do well to adopt that approach in regard to comments on the euro exchange rate. It was not my practice in the past to comment on the Irish pound exchange rate and I do not intend to comment on the euro exchange rate in the future. Discussions have taken place at ECOFIN on whether people in Europe should also adopt my button-lipped approach. We are aware of the effect comments by certain personages have had on the exchange rate on at least two occasions in recent months. I have indicated on many occasions that there is nothing the market makers love more than politicians and people in authority commenting on exchange rates. If one does not comment, one takes away the target for speculation. I encourage my European colleagues to adopt this approach.
