Brian Cowen (Laois-Offaly, Fianna Fail)

In ten years we have seen unprecedented economic growth, massive employment and relative price stability. Since we have come into the eurozone, there has been a divergence in inflation, which drifted to 3.2% higher than the average at one stage, but came down to zero in 2005 before going back to 0.5% in 2006. There have been recent interest rate increases which have fed into the inflation figure. That is affecting all economies in Europe. There are other issues for which we are not responsible. We cannot direct the cost of crude oil or gas prices as these are regulated sectors in the economy.

The most recent inflation forecasts produced by my Department were published in the budget. The Department forecasts that the CPI will increase marginally to an average of 4.1% this year, before falling to 2.4% next year and 2% in 2009. In the same period for the harmonised index of consumer prices, inflation is forecast to average 2.6% this year, 2% next year and 1.7% in 2009. We have good reasons to believe that the harmonised index inflation will average 2% over the medium to long term in line with the ECB target. Apart from the fact the 2% rate is the ECB's target measure, there are other reasons specific to Ireland which should cause the harmonised index to average around 2% in the future. For example, price levels in Ireland are currently the second highest in the EU. As inflation in Ireland cannot diverge continuously, the rate of inflation can be expected to fall over time, leading to the attainment of an average harmonised index rate of 2%. Demand will not be as strong in the future as the economy moves through a more stable growth phase. As competition increases across the economy, we can expect an easing of inflation. We have a more open labour market, which has already started to reduce wage pressures, particularly in the construction industry.

We have to be vigilant. It seems some of the recent high-profile job losses can be attributed to the fortunes of individual companies, rather than problems with national competitiveness. I am aware of the comments of the various finance houses. It is estimated that in the ten years to 2006, taxation added an average of just 0.5% per annum to the consumer price index. As the health and education sectors, for example, have relatively small weights in the basket of consumer goods and services, their impact on overall inflation is relatively low. Many of the factors which influence health inflation, such as the fees charged by doctors and dentists, are outside the Government's control. The increase in the price of oil is not exclusive to Ireland, as I have said, because all oil-importing countries are similarly affected. Its impact on our competitiveness will ultimately depend on how we respond.

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