The latest inflation figures serve to underline the strong recent performance of the economy. Rapid economic growth normally fuels inflation, but economic growth has been running as high as 6 to 7 per cent, while inflation has remained very subdued. For the moment, at least, Ireland is achieving the kind of non inflationary growth which is the envy of many other countries.
Consumer price inflation was running at just 2 per cent in mid February, according to the figures published earlier this week, and there is no reason to expect a strong pick up in price pressures over the rest of the year. International inflation remains subdued, mainly due to slow growth in continental Europe, while the strength of the pound against sterling on the foreign exchange markets will moderate the increase in import prices.
There are few signs of serious inflationary pressures in the domestic economy. The Central Bank may be looking at the housing market with some concern and is probably still uncomfortable with the pace of credit growth. But this week's Consumer Price Index figures show that whatever the pick up in prices in certain sectors, there is no evidence of an overall, increase in inflationary pressures.
This will not stop the Central Bank from being concerned. The main reason for its concern is that, inflation at the moment is being measured by the tough yardstick of the Maastricht Treaty. This stipulates that the inflation rate in states qualifying for economic and monetary union must be no more than 1.5 of a percentage point above the average for the lowest three members of the EU. At the moment this rate would be around 2.5 per cent, so any increase over the rest of the year will worry the Central Bank. It is the inflation performance next year which will count towards the final assessment.
So why is the inflation rate remaining so low? The key reason is that strong economic growth in recent years appears to have been largely based on improvements in the supply side of the economy driven by factors such as new industrial investment, public spending on areas like roads, supported by the EU, and a better trained and educated workforce. There has not been the kind of consumer spending boom which traditionally fuels inflation.
Consumer spending has remained subdued partly because wage increases remain low. However a new national agreement is to be negotiated to replace the Programme for Competitiveness and Work and employees will be looking for a higher return in take home pay. The way to do this is not to grant higher pay increases but to set down a programme of tax reliefs. But if tax reductions are to be afforded, then public spending must be controlled more tightly. The strong job creation record of recent years shows the value of striving to maintain a low inflation rate and build competitiveness.