The measures announced by the Government last night aim to keep expectations in check until inflation begins to fall towards the end of the year. But if Government calculations that oil prices will ease back and the euro continue to recover prove wide of the mark, there could be further trouble.
The trade unions gave the package a cautious welcome last night. They will be hoping almost as much as the Government that it contains enough to keep members quiet for another few months. The problem is that, beyond increasing competition, there is little the Government can do.
But what do these proposals amount to? There is talk of price controls and the Minister for State for Consumer Affairs, Mr Tom Kitt, is likely to introduce them on a broad range of drinks. Any price fixing is likely to be retrospective although he has yet to consult on what date to use. In any case, price controls are a blunt weapon and not an ideal tool of economic policy. Evidence of profiteering in sectors such as the pub trade may provide a reason to consider using it but enforcement is a real problem. After all, how can you prove exactly what price any drink was on a particular day in a particular pub and then enforce no change.
In any case, the ultimate policy goal must be to encourage more competition. Mr Kitt admitted yesterday the licensing regime seriously restricted access to the trade. He believes that passing the Intoxicating Liquor Bill will improve things but few other observers would have the same faith.
The Bill ignores a recommendation of the Competition Authority to remove the barriers to entry to the pub market, particularly in Dublin. The sale of liquor by other outlets is still being examined by a commission which is now to report in three months rather than two years.
Other measures to encourage the consumer to be more price aware are also welcome. And the Director of Consumer Affairs will no doubt use her additional money to monitor prices, enforce her mandate and run education campaigns.
The one area which will be very broadly welcomed is the promise that no public body will increase charges or fees for the remainder of this year. The CIE has already got its price rise and prices at the ESB are, if anything, falling in the new era of competition. But should an order apply to the VHI or to RTE, which is looking for a licence fee increase? If so, this could be very welcome news indeed.
The Government may now be regretting the expansionary nature of the tax cuts in last December's Budget, and the lack of offsetting tax cuts for the 50p increase in a packet of cigarettes which put an incredible 0.8 of a percentage point on the RPI.
Cutting excise duties on alcohol or the rate of VAT would bring the rate of inflation down but, by putting more money in people's pockets, could end up boosting demand and putting inflation back up over the medium term.
The ESRI has said that such measures could be welcome but should be packaged with other charges to reduce demand again - for example water or road charges.
The upcoming Budget will be critical to the future competitiveness of the economy. The ESRI has recommend delaying further tax cuts but that is unlikely to be possible, politically, for a Government committed to further raising living standards under the terms of the PPF.
