Inflation rate set to reach 6 per cent in first quarter

The rate of inflation is set to climb towards 6 per cent in the first quarter of the year, after new data show it rose to 5 per cent last month.

The Budget excise duty increases pushed the annual rate up from 4.8 per cent in November to 5 per cent last month, the highest rate since mid-2001 and more than twice the EU average. Economic forecasters expect the January rise in the lower VAT rate and higher charges for a range of public services will push the rate to over 5.5 per cent by next month.

Provided there is no major rise in oil prices as a result of events in the Gulf, inflation could ease later this year, they believe, although it could still average close to 5 per cent for 2003.

The latest figures from the Central Statistics Office show consumer prices rose by 0.7 per cent during December. The Budget excise rises were the dominant factor, accounting for 0.42 per cent of overall price rises. There were more modest rises in food, energy, transport (higher bus fares) and restaurant and hotel costs.

There were some signs of easing inflation in many categories, according to Mr Austin Hughes, economist at Irish Intercontinental Bank, suggesting improvement in the underlying inflation performance.

But "unfortunately any tentative improvement is being swamped by the impact of a barrage of increases in taxes and various public sector charges", he added, forecasting that inflation will rise to 5.7 per cent by February.

Later in the year, the impact of weak global activity, the benefit of lower import prices from a rising euro and lower mortgage rates will combine to bring the rate down, according to Mr Hughes, who predicts an average of 4.9 per cent for the year, compared to 4.6 per cent last year.

This would leave wage rises of 3.5 per cent this year under the proposed terms of the new deal running behind inflation. But the total deal terms of 7 per cent over 18 months could be roughly in line with inflation over the longer period.

Employers' body IBEC, involved in talks on the new deal, struck an optimistic tone, saying inflation could be running at 3.5 per cent at the end of the year.

IBEC's statement said it had put forward a programme, as part of discussions on an anti-inflation plan to feature in the new deal. It believes the Government should set a target of reducing inflation to 2 per cent. More aggressive implementation of competition policy and a regular report from the Competition Authority and the Director of Consumer Affairs could help achieve this, IBEC believes.

The ICTU is also believed to be supporting stronger competition policy and price monitoring arrangements, which are likely to be the central element of the national agreement inflation plan. But formal price controls appear most unlikely.

ISME, the small business lobby group not involved in the talks, accused the Government of "inconsistency and hypocrisy" by promising an anti-inflation initiative, while at the same time pushing up taxes and charges. It called for a reversal of the Budget rise in the 12.5 per cent VAT rate to 13.5 per cent.

The Opposition parties were highly critical of the Government's inflation record. The coalition "has come up with a thousand different ways in which it is making the ordinary public pay extra", says Mr Richard Bruton, Fine Gael's finance spokesman. This threatens jobs in vulnerable sectors, he said.

"Workers and those on social welfare cannot be expected to tolerate their living standards being eroded by increased inflation," said Mr Pat Rabbitte, the Labour leader. The Government was "sleepwalking the country into recession", he said, and must urgently outline specific measures to ease inflation, he said.

The 5 per cent inflation rate was "an ominous benchmark" according to Mr Dan Boyle of the Green Party, and the economy looked poorly positioned in a worsening world economy.