Bernard Durkan (Kildare North, Fine Gael)
Link to this: Individually | In context

Question 72: To ask the Tánaiste and Minister for Finance the extent to which he has examined specific inflationary trends which tend to make the economy uncompetitive; the action he has taken or proposes to take to address this issue; and if he will make a statement on the matter. [19360/07]

Brian Cowen (Laois-Offaly, Fianna Fail)
Link to this: Individually | In context

On Budget day, 6 December 2006, my Department forecast that Consumer Price Index (CPI) inflation would be 4.1 per cent this year. This forecast was based on the normal technical assumption of unchanged interest rates. The Budget day forecast for inflation on a Harmonised Index of Consumer Prices (HICP) basis — the EU inflation measure — was 2.6 per cent this year. As is the norm, my Department will be publishing updated inflation forecasts in the Pre-Budget Outlook due in the autumn. Since budget day there have been three quarter point interest rate increases — the latest one earlier this month. In the first five months of this year CPI inflation has averaged 5 per cent year-on-year which takes account of two of the three interest rate increases. Interest rates are a matter for the Governing Council of the European Central Bank. Mortgage interest currently accounts for about half of our rate of inflation. Excluding mortgage interest, the year-on-year CPI average would have been 2.6 per cent and the CPI excluding tobacco has averaged 0.2 lower than the full CPI so far this year. On the normal assumption of no further interest rate increases, the rate of inflation would be expected to moderate as the year progresses. The best measure of underlying inflation is the EU comparable measure of inflation, the Harmonised Index of Consumer Prices. It is used by the ECB because it removes the effect of interest rate increases which are made in order to reduce inflationary pressures. It is important therefore that we do not seek to compensate ourselves for these rises in interest rates as this would only lead to a wage/inflation spiral and reduce both our competitiveness and ultimately our real standard of living.

The Taoiseach, Minister for Enterprise, Trade and Employment and I recently meet with representatives from IBEC and ITCU to discuss the inflation situation in line with our shared commitments. The Government reaffirmed its commitment to framing public policy over the period ahead with a view, to the greatest extent possible, of minimising inflationary impacts and keeping costs for enterprise under control. It was also agreed that the Government and IBEC and ICTU would engage in the intensified co-operation in responding to the inflationary pressures within the framework of the Pay Agreement, and especially through the work of the Anti-Inflation Group and the High Level Group on Manufacturing. It is worth noting that indirect taxes have not been raised in the past three budgets which I brought before this house with the exception of tobacco excise which increased for sound health reasons. The last Government also removed the Groceries Order and this is having a dampening impact on food prices. The programme for Government also contains a commitment to increasing mortgage interest rate relief. Finally, I believe that the stable macro-economic environment that the last two Governments have created through the pursuit of sound public finances, and which this Government fully intends to continue, will support the economy's competitiveness going forward and will in turn provide the basis for achieving further economic and social policy objectives in the long-term.