The small decline in the rate of inflation in August is a welcome, if somewhat surprising, development. Despite rising fuel prices, the annual rate edged down to 2.6 per cent from 2.7 per cent the previous month. Fuel prices are rising, but slightly smaller-than-expected increases in other areas have held down the annual rate.
Meanwhile, a fall-off in oil prices on international markets has eased fears of a sharp rise in price pressures in the second half of this year. The future trend in oil prices remains uncertain, of course, but an increase in supply on world markets has led to a significant fall in crude prices in recent weeks.
The inflation rate is now a little above the EU average, but not significantly so. It is essential that in the months ahead prices here do not again move to well above the norm in our trading partners. If it does, our competitiveness will come under further threat. High inflation in recent years has left the actual level of prices here as among the highest in Europe - indeed on some measures Ireland is now the most expensive member of the EU. The only way for this situation to be reversed is for price rises here to remain below the average for a prolonged period.
Competitive forces are clearly at work in some sectors. The price of clothing and footwear, for example, has fallen over the past year, while prices remain subdued or have actually fallen in many other parts of the retail sector. However, in many areas of the service sector prices continue to rise well ahead of inflation. Higher doctors' and dentists' fees have pushed up health costs, for example. Meanwhile the cost of visiting a hotel or restaurant continues to rise relentlessly, posing further questions about the value for money available to tourists.
Government policy has a role in holding down inflation in the months ahead. In recent years increases in indirect taxes and other charges from the public sector have been a key factor in pushing up inflation. It is essential that in framing the Budget for next year, the Government pays attention to the priority in holding down inflation - the fall off in employment in hotels and restaurants in recent months is a clear signal of the danger when competitiveness comes under pressure in a particular sector. The decision to abandon plans to introduce a carbon tax next January appears to be driven in part by a desire to hold down inflation moving into 2005.
The reason the Government had to introduce a range of inflationary taxes and charges in recent years was that it lost control of spending before the last election. It must not make the same mistake again.