While the latest inflation figures show a small decline in the annual rate to 4.9 per cent, they do not provide much encouragement. A sharper decline in the rate had been expected, particularly as the March 2002 VAT rate increase was no longer affecting the annual comparison.
Prices rose in many areas last month and the annual rate could remain close to the 5 per cent range for some months.
There are a number of factors contributing to price pressures. One is the rise in indirect taxes and in the cost of a range of services provided by the State - such as electricity. The other is continued generalised price pressures, which are worrying at a time when the economy is slowing sharply and the rise in value of the euro should be bringing down import prices. Part of the reason for the sharp increases in the past two months was a rebound from price reductions during the January sales, but prices in areas as diverse as foodstuffs, meals out and hairdressing are also rising.
It was one thing for the rate of inflation here to be above the EU average at a time when the economy was growing rapidly. Now, however, with growth slowing rapidly, relatively high inflation is all the more serious. Exporters, already struggling because of the strength of the euro, are being further squeezed by an increase in a range of costs well ahead of the international average.
It is now evident that the Government miscalculated in the extent of excise and VAT increases in the Budget. By supporting the rate of inflation, these rises have helped to embed an inflationary psychology in the economy. Action is now required to combat this and unfortunately, despite the weak economy, the inflation rate will only ease gradually in the months ahead.
There are at last some signals of Government concern. The Taoiseach highlighted the issue in a recent speech. An anti-inflation group established under the new national programme meets for the first time next week. And the Cabinet is holding a special meeting on competitiveness early next month. It is essential that these initiatives lead to clear signals of intent - and to policy actions.
The Government needs to start by getting its own house in order. As part of a strategy to reduce the inflation rate towards 2 per cent, it needs to make clear that next year's Budget will not be another inflationary one and to take clear action to reduce other costs within its control. A much more active policy towards competition is another essential plank of an anti-inflation strategy. It is long past time that the Government started to focus on these issues.