The pick-up in the rate of inflation to 1.7 per cent last month comes as little surprise given the recent rise in oil prices. The increase was the second monthly rise in a row and confirms that the sharp deceleration seen since early last year has now ended.
The latest figures are no cause for undue concern. After all, inflation here remains below the EU average and the likely increase in the months ahead should not be dramatic, barring a sharp rise in oil prices. However, complacency is not in order either. The annual rate looks set to climb quickly back over 2 per cent and could even approach 2.5 per cent in the months ahead. This is unfortunate at a time when we need a prolonged period when inflation is below the level of our EU partners to try to restore competitiveness to the economy.
It is vital when considering this issue to distinguish between the price level and the rate of inflation. The rate of inflation is now relatively modest, but the difficulty is that the actual level of prices is now expensive by international standards. Another Eurostat survey of the price of basic commodities has this week confirmed this reality, showing that a basket of goods here is the most expensive in the EU. Unless the rate of inflation here remains below the EU average for a prolonged period, the level of prices here will remain relatively high.
There are lessons here for the Government and for the national pay talks. The Government is now a key contributor to inflation through increasing a range of charges to the public in areas such as health and education. Rising local charges are also a factor. With the public finances now recovering strongly, a key aspect of Government policy over the next couple of years must be not to contribute further to inflation.
Turning to the pay talks, it is essential that if a deal is reached it does not add to inflationary pressures. This will require flexibility on both sides. Trade unions must realise that increases significantly ahead of inflation could cost jobs in the years ahead, while the employers must be open to mechanisms to share the fruits of gains with their staff through the much wider application of profit sharing and similar schemes.
Both sides - and the Government as the biggest employer - must realise that genuine productivity improvements must lie behind increases ahead of inflation. Not enough attention was paid to this in agreeing the public sector benchmarking deal. The omens are now reasonably good for the economy. However against a background of international uncertainty, it is important that domestic factors do not contribute to pushing up inflation.