Anyone following the negotiations in the forthcoming talks between the social partners on the possibility of a new national wage agreement will hear arguments about wage increases keeping pace with rises in the cost of living.
One factor in these arguments is the Consumer Price Index which is used as a benchmark for setting wage rises. However, the role of this index may now be open to question.
The shortcomings of the CPI were raised by the Central Bank at the presentation of its Spring Bulletin this week. Contrary to the contention that the CPI is the fairest way of measuring rises in the cost of living and is the only method which gauges pure price rises across the economy, the Central Bank maintained it was actually underestimating or "flattering" the real picture.
This view will be shared by many people who see that the rise in their own cost of living appears to be far higher than that portrayed by the CPI.
The index is based on a basket of goods reported in the household income survey and thus only measures pure price increases rather than any actual changes to the goods people are buying in the shops.
One of the other drawbacks of the system is that it does not include house or other asset prices which have been rising significantly over recent years. Thus the rising cost of buying a home or land is not measured by it. At the same time it does include mortgage interest repayments which have been going in the opposite direction to house prices.
However, the Central Statistics Office (CSO) argues that it includes everything possible on the cost of housing including renting and that the actual cost of housing is investment in an asset which is appreciating rather than depreciating over a fixed period. On top of that only a small proportion of the population is engaged in house purchasing in any one year.
Many economists and statisticians like the CPI, primarily perhaps because it is tidy, partly because it is never changed and thus comparisons across the months and years are valid. At the end of January it was 1.5 per cent from a peak of 3.2 per cent last August.
The related method of measuring inflation is the harmonised index of consumer prices. This was first instituted by the European Central Bank's forerunner the European Monetary Institute, as a method of measuring price changes that would be valid across countries. One problem the EMI had was the different methods of calculating inflation across the different European countries. Most notably both Ireland and Britain took mortgage interest repayments into account, but Continental countries did not.
The ECB is currently using this system but it is still far from optimal. The so-called basket of goods it covers only includes about 80 per cent of what people actually spend their money on. Apart from mortgage interest repayments, medical and home insurance are omitted, as are medical and educational fees.
The harmonised index has followed a similar pattern to consumer prices. It started 1998 at a lower rate than the CPI, peaked at 3 per cent in August and declined more slowly after that. Most recently it was running at 2.1 per cent at the end of January. According to the Central Bank it has been more indicative of underlying inflation.
But there is another method of calculating inflation, which is most notably used by the European Commission. This is the so-called consumption deflator. This is a more broadly-based method and tracks what people have actually been spending their money on daily, rather than relying on a sample report in the household survey. It is not price-based the way the CPI is.
According to this measure the Irish consumer will be facing price rises of some 2.25 per cent this year - the same as last. And according to the Central Statistics Office, prices based on this measure varied from 2.7 per cent in 1994 to 0.9 per cent in 1997.
This measure still does not take into account any measure for house price or other asset price increases. According to Central Bank officials, it is possible to make up for this by taking the amount of money spent on residential building and construction over the year and then weighting it to come up with a far more broad based measure. This year that would mean rises of some 3.2 per cent, according to Central Bank estimates.
But as Mr Dermot O'Brien, chief economist at NCB Stockbrokers, points out, the problem with including any weighting for property is that only a small number of people are buying homes in any one year.
"In a similar way you could include art prices, although only a few invest in art," he says.
The major problem that economists have with the deflator itself is that it is not a pure price effect. It takes changes in the pattern of consumption into account and can be subject to revision. It is also only published annually by the CSO, although that can be expected to become quarterly over the near future.
Of course, for many people it is the changing pattern of consumption that affects their spending: the plain pizza on a shopping list two years ago may be replaced by a gourmet, and more expensive, variety today. The deflator has the benefit of taking into account the changing patterns of purchasing in a more affluent society.
The pros and cons of all these measures are likely to be debated over the coming months between the social partners. According to SIPTU's head of research, Mr Manus O'Riordain, all the measures will need to be taken into account in future talks. He points out that the real experience of people is the driving force. "In all these things we need parallel measures whether on price or unemployment. There is no single valid measure of inflation and the complexity should be reflected in public administration and the various actors getting to grips with that complexity," he noted.
The key question is whether the real cost of living for Irish consumers this year will rise by 1.5 per cent based on the CPI, or 2.25 per cent according to the deflator, or 3.2 per cent if housing costs are taken into account.
