The rate of inflation rose again last month, touching an annual rate of 5.6 per cent and providing an unwelcome surprise to the Government, which had hoped that it would start falling back from the 5.4 per cent recorded in March. Rises in food and drink prices were mainly to blame. Now the risk is that the average rate for the year will be 5 per cent or more, further fuelling wage demands. Measures to boost competition would be the appropriate response from the Government.
The April increase was the third monthly rise in a row, coming as something of a surprise at a time when inflation was expected to be easing. Food prices were driven higher by a rise in the cost of meat and meat products, presumably due to the food and mouth crisis. There were also increases in the price of alcoholic drink, transport and housing, while fuel prices fell. Having fallen back from the 7 per cent peak reached last October, there is a risk that the recent rise is a signal that a higher inflation rate is becoming entrenched in the economy. The main risk is that the rising rate fuels wage demands and that a higher level of wage inflation becomes the norm. This would damage competitiveness at a time when the international economy is slowing and , if sustained, threaten the Republic's long-term growth potential.
The figures generated the expected political reaction, with the Opposition parties using them to attack the Government's record. The Government did, indeed, introduce two successive budgets which injected a substantial amount of money into the economy, helping to fuel inflationary pressures. The weak euro and higher demand reflecting the economy's strong growth rate have also played their part. And possibly the most dangerous inflationary factor - higher house prices - are not even reflected in the consumer price index.
So what can the Government do? Its most powerful tool would be a drive to increase competition, as recommended in the most recent report from the Organisation for Economic Co-Operation and Development. This would involve liberalising a wide range of areas, ranging from the pub trade to pharmacies and legal services. The Groceries Order, which limits competition in the food sector, should also now be abolished.
In the run up to a general election, however, the Government is unlikely to be brave enough to undertake these measures. It has promised to study the recommendations of the OECD report and to introduce a programme of deregulation. But actions will speak louder than words. The deregulation of air travel and telecommunications have proved, beyond argument, the benefits of competition in holding down prices for consumers. Spreading competition across other areas of the economy would be a powerful long-term measure to help hold down inflation. The Government, however, is more likely to opt for less effective short-term palliatives.