There is "no basis" to the notion that the economy is heading into an "inflationary spiral". So said the Taoiseach, Mr Ahern, speaking to a Chambers of Commerce conference yesterday. There are inflationary pressures in the economy, he said, but the annual rate of consumer price inflation should moderate in the second half of the year. Mr Ahern's prediction may be correct - but it is far too early to be sure.
Market analysts expect that next Tuesday's consumer price index figures for April will show a small decline in the annual rate of inflation from the 4.6 per cent registered the previous month, or at worst no further increase. Some believe that the March figure may prove to be the peak of the current cycle. However the economy remains vulnerable to a number of international factors, including the price of oil and the trend in the euro. The movement in oil prices will be particularly important in the months ahead.
But the main inflationary threat is one not measured in the consumer price index - the cost of housing. The latest Department of the Environment figures showed a 16.4 per cent rise in new house prices last year and a 22.5 per cent rise in secondhand prices last year. There is some evidence that the rate of increase is moderating, but the high price of houses and the associated large mortgage loans do leave many borrowers vulnerable in the event of an economic downturn.
Policymakers here are somewhat constrained in fighting inflation. Since we joined the euro zone, they cannot increase interest rates unilaterally. And Budgetary policy would be a blunt weapon with which to attack inflation in a small open economy such as the Republic. Wages policy is one obvious area in which Government policy can influence inflation. Here, it must stand firm against the more outrageous demands now emerging. One difficulty is that there is no adequate performance-related framework in place to adjudicate on many of the demands; there is a considerable difference in policy terms between granting pay increases based on genuine increases in productivity and increases based on little more than people's desire to be paid more.
In this context the introduction of a new performance management and development system in the civil service is welcome, and long overdue. This employee evaluation system must be in place before the final round of the PPF increases are paid, although it must be noted that there is as yet no agreement to use it as a way of agreeing performance-related pay rises. Both the public and private sectors have been slow to develop performance-related pay systems or profit sharing measures which would help to square the circle between pay demands and the needs of the economy.
Measures to attack the skills shortage, transport bottlenecks and housing supply were also correctly identified by Mr Ahern as vital. They will have a key longer-term impact on inflationary pressures and on the potential growth rate of the economy, but will have little influence in the short term. During the months ahead it will be international developments, the movement in house prices and wage trends which will be the key influences on the inflation outloook.