Low inflation 'may cut wage rises'

THE lowest inflation rate in five years could cut wage increases to close to 3% this year, according to key economists.

Inflation fell to just 1.8% in January compared to 4.8% 12 months ago, figures released by the Central Statistics Office yesterday reveal. However, economists believe inflation might increase again later in the year and could end the year at 2% or 2.5%.

The EU Harmonised Index of Consumer Prices HICP used for comparisons with European inflation has fallen to 2.3% in Ireland, only a little ahead of the EU inflation rate of 2% in December.

IIB Bank chief economist Austin Hughes believes inflation could be at 2.5% by the end of the year but Friends First chief economist Jim Power believes inflation will be close to 2% by the end of 2004. IBEC chief economist, David Croughan agreed with Mr Power saying that inflation for the year as a whole was now likely to be under 2%.

The most significant monthly price changes were decreases in clothing and footwear -14.8%, furnishings, household equipment and routine household maintenance -2.6% and miscellaneous goods and services -0.4%. However, there were increases in health +2.9% and restaurants and hotels +0.4%. The most notable changes over 12 months were increases in health +6.9%, education +6.4%, alcoholic beverages and tobacco +4.5%, restaurants and hotels +3.7% and communications +2.9% while there was a decrease in clothing and footwear -4.0%.

IIB's Austin Hughes said they reckon Irish inflation will average slightly above 2% in the coming year but said the end of 2004 it could be above 2.5%.

"Against this backdrop it would not seem unreasonable to envisage Irish wage increases approaching 3% in the next pay round. That would ensure a modest rise in real incomes in Ireland".

However, Mr Power believes the trend towards lower inflation will remain in place. "The average rate for the year is likely to be no greater than 2%. This will set a favourable backdrop for Government and employers as they sit down over the coming months to negotiate a new social partnership agreement," he said.

Mr Hughes said the improvement in Ireland's inflation performance in the past year has been quite dramatic.

"In January 2003, the gap between Irish inflation was 4.7% (on the EU basis) and the eurozone average at 2.1% was 2.6% percentage points. If you correct for a greater contribution from government measures to inflation in Ireland or the fact that the eurozone average is heavily influenced by the absence of inflation in a near lifeless German economy, it follows that the underlying trend in Irish inflation is probably below that in most other eurozone countries at present".

Mr Power said the significant slowdown in the rate of increase in prices is good news for the Irish economy.