"Grave Concern" Over Ireland's Rising Inflation

Lisa Ugur, Tax-news.com, London

29 September 2000

In its Quarterly Bulletin for Autumn 2000, published yesterday, the Central Bank of Ireland expressed "grave concern" about the country's soaring inflation rate and warned that the so-called Celtic Tiger could see the current boom give way to a recession if wage increases are not kept under control. The Central Bank said that inflation, currently running at 6.2 per cent, may be accelerating: 'Of major concern is the possibility of inflationary expectations developing a momentum of their own', said the bulletin.

No one could argue with the fact that the Irish economy continues to grow strongly, least of all the Central Bank. Ireland has seen an average annual growth rate of 8 per cent in real terms over the past six years. However, the main concern of the Central Bank is that the increase in the rate of inflation in the past year may be the start of a downward spiral. In the Central Bank's words: 'The scope for sustaining similar growth rates in the future must inevitably decline as capacity constraints are felt. The increase in the rate of inflation in the current year suggests that Ireland may have entered a new, rather uncertain, phase of its economic development. Labour shortages, congestion and house price inflation are further indications that the economy is operating at or above its productivity capacity.'

The current rate of inflation of around 6 per cent is the highest since 1995 and is well in excess of what is usually deemed to be price stability. The Central Bank says the way to curb inflation is through fiscal and wage restraint and measures to increase competition in certain industries. Already circulating is the prediction that inflation next year should average around 4 per cent, but the Central Bank believes this figure is still too high. Yesterday's report said 'it is too much ahead of the expected rate of inflation of the euro area as a whole and it is based also on the expectation that restraint on wages and a non-expansionary budget can be achieved.'

Issuing its warning on the future of the booming Irish economy, the Central Bank said: 'If inflation were to continue at an excessive level, the competitiveness of the Irish economy would be seriously impaired over time and the indigenous sector, in particular, would suffer.'

The problem of wage rises is undoubtedly central to the inflation problem. They currently average 7.25 per cent. However, the Central Bank's suggestion that they be held back as an anti-inflationary measure coincided with comments from Ireland's biggest union which appeared to threaten industrial action to achieve wage increases to compensate for rising inflation. Jack O'Connor, vice-chairman of the Services, Industrial Professional Technical Union (SIPTU), said his members were ready to do whatever was needed to achieve the improvement in living standards underwritten in last year's wages agreement between unions, business and the Irish government.

The fortunes of the euro, too, seem to be inexorably linked to Ireland's inflation crisis. The Central Bank said: 'Future developments with respect to the euro are likely to have a significant influence on inflation prospects. A stronger euro would make it easier to ensure that price stability is maintained and this is in Europe’s longer-term interest.' However, leaving it to the euro to dictate the path of Irish inflation does not seem to be a universally-accepted strategy. Earlier this month, Wim Duisenberg, President of the European Central Bank, said that Ireland, a member of the 11-country eurozone, must tackle its inflation problem on its own. However, the Central Bank is struggling with it and it is unlikely to be an easy task.

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