Jan O'Sullivan (Limerick East, Labour)
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Question 118: To ask the Tánaiste and Minister for Finance his Department's forecast for the expected increase in the consumer price index for the full year of 2007; the way this compares with the forecast he gave in his budget 2007 speech; his views on whether the level of inflation continues to run at 5%; the measures he will take to deal with this issue; and if he will make a statement on the matter. [29577/07]

Brian Cowen (Laois-Offaly, Fianna Fail)
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On Budget day, 6th December 2006, my Department forecast that Consumer Price Index (CPI) inflation would average 4.1 per cent this year. This forecast was based on the normal technical assumption of unchanged interest rates. In accordance with usual practice, my Department published updated inflation forecasts in the Pre-Budget Outlook in October, and the CPI was assumed to average 4.9 per cent for this year.

Since Budget day there have been three quarter-point interest rate increases. Interest rates are outside the control of the Government and are a matter for the Governing Council of the European Central Bank (ECB). In the first ten months of this year CPI inflation has averaged 4.9 per cent year-on-year. Mortgage interest currently accounts for a significant proportion of this increase. Excluding mortgage interest, the year-on-year CPI average would have been 2.8 per cent. On the normal assumption of no further interest rate increases, the rate of inflation is expected to moderate next year, and this is reflected in the Pre-Budget Outlook forecast for CPI inflation of an average increase of 2.2 per cent over the period 2008-2010. The Budget day forecast for the Harmonised Index of Consumer Prices (HICP) inflation — the EU inflation measure — was 2.6 per cent for this year.

The best measure of underlying inflation is the EU comparable measure of inflation, the HICP. 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. In the recently published Pre-Budget Outlook, the HICP was forecast to average 2.8 per cent for this year.

Where possible, this Government will take action to contain inflation by implementing responsible fiscal policies. Indirect taxes have not been raised in the three budgets which I have brought before this House with the exception of an increase in tobacco excise which was in support of health policy.