Inflation has fallen to 4.2 per cent with July marking the third successive monthly decline. At first glance the figure seems to contain some long overdue good news on the economic front.
Unfortunately this optimistic interpretation does not stand up to scrutiny. The main feature of the decline in inflation reported yesterday is an 11 per cent fall in the price of clothing and footwear, as a result of the summer sales. The reality is that once the impact of the summer sales is stripped out, the prices of most goods and services remain on a strong upward trajectory. The figures also confirm that the discounts offered by retailers this summer are larger than last year, a clear sign that this sector is feeling the pinch.
Next month we can expect to see inflation return to an upward path as the impact of the sales unwind and it will remain high for the remainder of the year. The danger that this level of inflation poses for the economy has been well aired at this stage, but bears repetition. Higher prices lead to pressure for higher wages and this ultimately will strike at the competitiveness of the export sector which is the well spring of the economy. It will not happen overnight but it is inevitable. The latest warning to this effect came three weeks ago from the Economic and Social Research Institute and like previous warnings appears to have fallen on deaf ears in Government circles.
In truth there is little that the Government can do to directly combat inflation. The main weapon against inflation is interest rates and these are now set on a eurozone basis. Inflation is just not a problem for most of the rest of Europe and pressure for a rate rise is fading as doubts about the strength of the US recovery grow. There is speculation that US rates may fall even further - possibly as soon as today - which will further damped the prospects of an early rise in European rates.
The tools available to the Government are limited and the most useful are wage restraint and public spending restraint. Pressure for action in both these areas has been building steadily for most of the year and the Government has taken a number of steps in the direction of cutting spending, but has yet to make significant progress on benchmarking and a new national wage agreement, the main planks of its wages policy. When ministers return from the summer break the August inflation figure will be on their desks. It will confirm what they already know; they have more to do.