Lack of competition ‘driving inflation’

A LACK of competition in key sectors of the Irish economy is keeping Irish inflation at twice the European average, two leading economists declared yesterday.

The annual rate of inflation fell to 4.3% in April from 4.9% in March but remains the highest in Europe, the latest Consumer Price Index figures from the Central Statistics Office reveal.

Figures indicate that increases in indirect taxes and public sector charges account for 1.8 percentage points of the current 4.3% figure. The CPI excluding tobacco is up just 3.9% in the year.

In separate and independent analyses, IIB chief economist, Austin Hughes, and Friends First chief economist, Jim Power conclude that the inflation rate will continue to fall but stress domestic price stubbornness is now in sharp contrast to prices set internationally.

Mr Hughes said: "A trend towards lower Irish inflation is now becoming established because of weaker global economic conditions and the rising euro but continuing domestic cost pressures means the scale of last month's decline is unlikely to be repeated unless interest rates and/or oil prices collapse."

Mr Power believes that over the remainder of the year the headline rate of inflation will gradually edge lower.

"Unless there is some serious unexpected shock, such as higher oil prices or further government- induced price increases, the annual rate could hit 3% or slightly lower by the end of the year.

"This could result in an average rate of around 4.2% for the year. This represents a downward revision to my previous forecast of 4.6%, largely due to weaker than anticipated consumer demand, lower oil prices and a stronger euro," he added.

Mr Power said the bottom line is that inflationary pressures in certain segments of the economy are still very strong.

"Annual inflation is still running at 5.5% in the services sector, 8.4% in the health sector, 10.4% in education, and 6.4% in restaurants and hotels.

"In contrast, inflation in areas where there is some competition is much more subdued, with prices actually down by 4.1% for clothing and footwear, and up by just 1.3% in the communications sector.

"Clearly, a policy focusing on increased competition is essential but it will take quite a considerable period of time.

"Despite the time lag involved it is still a very worthwhile policy and one that should be pursued with vigour despite the opposition of vested interest groups.

"Unfortunately, many of the areas where inflation is still running at high levels are areas that undermine the overall competitiveness of the economy," he said.

"Increases in electricity and phone bills reflected domestic pricing power whereas deflation in clothing and footwear prices intensified (from 3.9% to 4.1%) because of a glut of commodities on world markets," he added. Mr Hughes said at best, the drop in inflation is mixed news for the Irish economy.

"In the near term at least, the drop in inflation will bolster the purchasing power of Irish households and sustain those business sectors focused on consumer spending.

"Put simply, the cost of living in Ireland is now easing at a far quicker pace than the cost of producing, a divergence that bodes poorly for the employment outlook," he added.