Brian Cowen (Laois-Offaly, Fianna Fail)

On budget day, 6 December 2006, the Department of Finance forecast that consumer price index inflation would be 4.1% this year. That forecast was based on the normal technical assumption of unchanged interest rates. The budget day forecast for the harmonised index of consumer prices inflation — the EU inflation measure — was 2.6% this year. As usual, the Department will publish updated inflation forecasts in the pre-budget outlook, which is due in the autumn. There have been three interest rate increases of 0.25% since budget day, the latest of which was earlier this month. CPI inflation has averaged 5%, year-on-year, in the first five months of this year, during which two of the three increases took place. As interest rates are a matter for the governing council of the European Central Bank, they are outside the control of the Government.

Mortgage interest accounts for approximately half of Ireland's rate of inflation. If the effect of mortgage interest is excluded, the year-on-year CPI average is 2.6% so far this year. The CPI excluding tobacco has averaged 0.2% lower than the full CPI so far this year. If one maintains the normal assumption that there will be no further interest rate increases, the rate of inflation is expected to moderate as the year continues. The EU comparable measure of inflation — the harmonised index of consumer prices — is the best measure of underlying inflation. It is used by the ECB because it removes the effect of interest rate increases which are made to reduce inflationary pressures. Therefore, it is important that we do not seek to compensate ourselves for such rises in interest rates, as that would lead to a wage inflation spiral and would reduce our competitiveness and, ultimately, our real standard of living.

On foot of a statement made by the Taoiseach on 7 June last, it is planned that the Taoiseach, the Minister for Enterprise, Trade and Employment and I will meet representatives of IBEC and ICTU this week to discuss how we can tackle inflationary pressures together in line with our shared commitments. Where possible, we will take action to contain inflation by implementing responsible fiscal policies. Indirect taxes, with the exception of tobacco excise which I increased for sound health reasons, were not raised in the last three budgets I brought before the House. The decision of the last Government to abolish the groceries order is helping to reduce food price inflation. The stable macroeconomic environment created by the last two Governments through the pursuit of sound public finances, which this Government fully intends to continue, will help the economy to remain competitive and will provide the basis for achieving further economic and social policy objectives in the long term.

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