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20 July 2000 Edition

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Inflation figures - Ahern and McCreevy to blame

Inflation figures - Ahern and McCreevy to blame



BY ROBBIE MacGABHANN

Inflation figures of 5.5% for the last 12 months provoked a barrage of criticism of government economic policies this week, as trade union leaders, employers' organisations and opposition parties all hit out at the Fianna Fáil/Progressive Democrat coalition's inaction on the growing price spiral.

For the trade union movement, the inflation figures have lead to demands for the renegotiation of the Partnership for Prosperity and Fairness (PPF), agreed earlier this year.

``The PPF is a lie. It is no longer worth the paper it is written on. A national wage agreement which in real terms actually reduces wages is a disgrace and is not acceptable'' was the response of ATGWU regional secretary Mick O'Reilly. The ATGWU have always been opposed to the PPF and have been seeking a special recall conference on trade union participation in the PPF since early June.

The figures were a severe knock back for both Bertie Ahern and Charlie McCreevy. The Fianna Fáil leader and his finance minister had predicted a 3% inflation rate for the end of the year. It would take a huge drop in prices to make this figure happen now.

So far, the coalition's response has been to introduce price controls on alcohol and other consumer goods but they have not faced up to the actual causes of inflation, such as higher oil prices, the single currency, house prices and general profiteering by businesses unregulated in the market place who have been able to consistently hike consumer prices. The 90% increase in house prices over the past three years is the clearest example of such practices.

Part of the reason for the Dublin Government's head in the sand approach is the fact that they have little control over some of the core factors contributing to inflation.

They cannot lower oil prices and have not lobbied the EU to act internationally on the issue. Membership of the single currency means we cannot use interest or exchange rates which were employed successfully in the past to control inflation.

On the domestic front, Ahern promised in June that he would not allow ``a situation where there was excessive profit taking, especially through anti-competitive practices''.

``We rightly espouse the benefits of a vigorous market economy. We must recognise that vigorous policies to support competition are a characteristic of the most dynamic economies,'' said Ahern.

Here we are, one month on, and there is still no sign of action from the coalition, despite Ahern's promises. Perhaps their first step should be to reclaim the power over the economic sovereignty they so easily gave away.

 


Inflation made simple



What is Inflation?

Inflation can be described simply as the percentage rise in the average price of goods over time. It is measured by compiling the average basket of goods consumed by households.

The Central Statistics Office (CSO) measures inflation with a basket of goods that includes costs of tobacco, housing in terms of mortgage payments and rent, fuel and light, transport, clothing and footwear, alcoholic drink and general services.

Consumer inflation as a figure usually refers to the change in prices over the previous 12 months. This week's figures refer to the 12 months to end of June 2000.

 


Why is Inflation such an issue?

Inflation is an issue because it shows, when compared with figures for increases in profits, wages and wealth, the real level of growth in an economy. For example, the ICTU agreed wage increases this year of 5% under the terms of the Partnership for Prosperity and Fairness. If, as predicted, inflation reaches 6% by the end of the year, the wage increase will have disappeared and workers will be worse off.

 


Inflation made simple



What causes inflation?

Inflation in Ireland is being caused by two sets of factors. First are the external factors. These include our membership of the single currency. A significant amount of ordinary household supermarket purchases are food and other products made in Britain, which did not join the euro. Over the last year, the punt has fallen by nearly a quarter of its pre single currency position with sterling. This has made goods imported from Britain significantly dearer.

These increases have been compounded by increases in crude oil prices, which are at record high levels. Many businesses are dependent on oil products for transport, power and other areas of production. They have passed on these increases to consumers by simply raising the prices of the goods they sell.

Internal factors driving inflation include house prices and a thriving economy where competition for resources is bidding up the price of goods. It is a simple fact of market economics that if a good is deemed to be scarce, the price of it will go up.

The economy has grown so fast over the past four years that many businesses are spending huge sums to expand their businesses. When these businesses start operations, they pass on the higher set up costs to their customers.

This suits other businesses, who will in many cases increase their prices if they think the market will tolerate higher prices. A good example of this in practice is the wide difference in the price of alcoholic drink between the newer factory pubs and older, smaller establishments in Dublin.

The need for short-term profits is driving domestic inflation and in the long run many of these new businesses might not be still in business.

Another important factor is the availability of consumer credit. Competition between banks has driven down the cost of borrowing and people have been borrowing to buy consumer durable goods such as cars and domestic appliances. They have also been spending more money on entertainment than ever before. This has driven up the prices of these goods.

 


What is an inflationary spiral?

This happens when inflation is growing over a period of time and the main players in an economy begin to expect more price increases. They automatically increase their own prices and this causes an inflationary cycle with prices growing even further and everyone trying to catch up.

The 1970s were the last example of such an inflationary spiral. Then, as now, workers were blamed for causing inflation when the truth in both time periods was that the causes of inflation were not driven by workers' wage demands but by a broad cross section of factors, including huge oil price increases.

 


Who is suffering most?

It is not surprising that families on low incomes and people dependent on social welfare payments are suffering most from the inflationary spiral. It is they who spend a high proportion of their income on food and other imported supermarket products. The price increases are significantly lowering the living standards of these households. The increases in social welfare payments granted this year were lower than the 5% increase granted to workers this year.

Next to suffer are the thousands of families who have to spend large sums to buy a house and are also struggling with higher mortgage payments and higher food costs.

It should not come as a shock to find that the higher wage earners are the least affected by the price increases and will find it easier to withstand the inflationary spiral the economy is going through.

It is also worth noting that the people who come from these social groups make up the leadership of the employer organisations and establishment political parties who are most likely to call for wage restraint from the ordinary workers most affected by this crisis.
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