Dáil Éireann díospóireacht -
Tuesday, 23 May 2000

Vol. 519 No. 5

Written Answers. - Inflation Rate.

Ivor Callely

Ceist:

37 Mr. Callely asked the Minister for Finance the issues driving the rising inflation rate; the impact of the doubling of crude oil prices on the rate of inflation here; the Irish input to such oil price increases; his views on the suggestion to curtail public spending and pay increases in an effort to address inflation; and if he will make a statement on the matter. [14194/00]

Bernard J. Durkan

Ceist:

59 Mr. Durkan asked the Minister for Finance if his attention has been drawn to the recent indications of further inflationary tendencies; if he has identified the cause or causes; the potential consequences of increases in inflation; the action he will take in this regard; and if he will make a statement on the matter. [14239/00]

Thomas P. Broughan

Ceist:

76 Mr. Broughan asked the Minister for Finance the projected level of inflation for the current year; the way in which this compares with the EU average; the implications of the latest figures for economic policy; and if he will make a statement on the matter. [14260/00]

Minister for Finance (Mr. McCreevy):

I propose to take Questions Nos. 37, 59 and 76 together.

The most recently published inflation figures for Ireland which relate to April show a year on year increase of 4.9% in the consumer price index, CPI, and a 5% increase in the harmonised index of consumer prices, HICP. The EU HICP for the same period was 1.7%; for the euro 11 it was 1.9%. The increase in inflation in Ireland has been due to a number of factors, which include the sharp increase in oil prices, the fall in the value of the euro, the budget increase in excise duty on tobacco and an increase in underlying domestic inflation.

The impact of higher energy prices in particular has been significant. Crude oil prices increased from a low of $11 per barrel in March 1999 to a peak in March this year of over $30 per barrel. In Irish punt terms the increase was larger due to the fall in the value of the euro. The energy products index is up 15.3% in the year to April 2000 and it is estimated that this has added close to 1.5% to the CPI. The increase in excise duties for health reasons on tobacco has also added about 1% to the CPI and this will pass out of the index by the end of the year.

Thus, a large part of the recent increase in inflation reflects exceptional factors. These factors will become less significant over time and, as a consequence, it is expected that inflation will fall in the second half of this year. The extent of these falls will depend on the value of the euro and future oil price developments.

Notwithstanding this uncertainty, it is now clear that inflation will be higher than the 3% average for the year which was forecast on budget day. A revised forecast will be published as usual by my Department in the economic review and outlook in July-August. It is now expected that inflation will average in the order of 4% for the year as a whole, though the rate will be less than this at end December.

I am aware that this is higher than expected when the terms of the Programme for Prosperity and Fairness were being negotiated. However, this agreement is for three years and I am confident that over the remaining period of the agreement inflation will fall well below current levels. In this context, the appropriate policy response is to fully implement the terms of the PPF. The agreed pay increases combined with promised tax reductions will provide for continued gains in real disposable incomes.

It is the Government's view, therefore, that the pay terms of the agreement must be adhered to. An unsustainable wage-price spiral would do severe damage to competitiveness and future economic prospects and undermine the progress we have made in recent years. Adherence to the agreement will ensure that the recent rise in inflation is temporary.