Inflation is now running at its highest level in more than three years, doubling in 13 months to 4.2 per cent. Predicted increases in interest rates and the price of oil make it possible that the rate will top 5.5 per cent by the end of the year or early in 2007. Average inflation for this year is expected to be about 4 per cent.
In simple terms this means that the typical household will find itself paying something in excess of €300 a month more this December in mortgage interest, energy bills and other expenses than it did last December.
It is a significant sum and the Government's response to the problem to date is far from satisfactory. The Minister for Finance and his colleagues appear only too willing to let themselves be cast in the role of hand-wringing, hapless victims of the external forces driving much of the inflation: European Central Bank rate rises and the price of oil.
This is not only something of a cop-out, it is also disingenuous. As analysts pointed out this week, a significant element of inflation is attributable to factors other than higher interest rates and energy bills. When the impact of energy prices and interest rates is stripped out of the data, underlying inflation has still doubled since July 2005. The main driver of what is termed "core inflation" has been the price of food, package holidays, accommodation and a number of other items such as insurance, particularly health insurance.
It is clear that a significant amount of inflation is domestically generated and thus the Government does have some, albeit limited, tools at its disposal to combat it. What it most certainly does not have is either an excuse or a reason to sit on its hands and hope that the problem will resolve itself. Sustained high inflation will further erode the competitiveness of Irish exports and undermine the nascent national agreement, Towards 2016, which assumes much lower rates of inflation than those prevailing now.
A number of responses have been suggested in recent days, including the re-establishment of an anti- inflationary group involving the social partners to address the issue. But the most significant weapon in the Government's armoury is its own spending power which can significantly affect demand. The Minister for Finance would be well advised to heed the chorus of warnings coming from reputable bodies including the Economic and Social Research Institute and the International Monetary Fund to avoid a reckless pre-election spending spree and, in particular, an unnecessarily generous budget in December.