The record headline price drops, reported today by the CSO , are very welcome in terms of Ireland’s competitiveness. Having seen fuel and food prices sky-rocket in recent years, it is encouraging to see that they continue to fall as supply pressures ease. These are staple purchases for families across the board, so any succour to the household budget is welcome given that incomes are also under pressure.

It is important to look at the different price measures appropriate for different sectors of the economy. For instance the HICP measure of inflation is the accepted measure at EU level as it tends to be less volatile and excludes interest rate changes.

Given that social welfare recipients, as a group, are less likely to have large mortgages, the HICP is often considered to be a better measure of changes in their cost of living. This point has been acknowledged by Dr. Colm McCarthy, among others, and is worthy of further exploration given Fianna Fáil have signalled their desire to slash welfare. From Minister Lenihan’s parliamentary reply (below) to me on this issue this week, it would appear that he is oblivious to this important distinction.

The headline fall in the CPI must not be used as a cynical ploy to pick the pockets of the most vulnerable through welfare cuts. Welfare recipients also tend to spend a bigger proportion of their income out of necessity, so there is a strong economic argument for protecting welfare rates at a time when demand in the economy has been floored.

Another aspect to falling inflation and falling incomes is the increase in the real debt burden. The nominal value of what people owe doesn’t change just because prices or incomes change or because people lose their jobs. Ireland’s credit-fuelled economic boom has turned to bust leaving Irish people among the most indebted in the world.

Many are struggling to make ends meet and keep up loan repayments. As people use up savings, lose benefits or suffer further drops in income, they are in danger of bankruptcy, and many fear losing the roof over their heads. One simple measure which Labour has advocated is a moratorium on family home repossessions to remove at least this immediate source of anxiety. As the recession continues to bite, personal indebtedness is set to become a major social, economic and policy challenge in the years ahead. Our arcane bankruptcy laws require an urgent update, while extra-judicial debt settlement mechanisms must be explored.

It is quite clear that costs will have to fall further, and fall significantly, if Irish competitiveness is to be regained. Cost is not the sole source of competitiveness, but it is undeniably among the most important. Prices have begun to come down from their peak Celtic Tiger levels in most sectors, but not all. Further Government intervention may well be appropriate in certain sheltered sectors to ensure price drops are passed on to consumers and businesses.

DÁIL QUESTION

NO 206

To ask the Minister for Finance his views on the best measure of price inflation facing social welfare recipients, whether it be the consumer price index, the harmonised index of consumer price or other, in view of the relatively lower propensity to have a large mortgage of social welfare recipients; and if he will make a statement on the matter.

– Joan Burton.

* For WRITTEN answer on Wednesday, 7th October, 2009.

Ref No: 34641/09

REPLY

Minister for Finance ( Mr Lenihan) : The Central Statistics Office (CSO) publishes monthly both the Consumer Price Index (CPI) and the Harmonised Index of Consumer Prices (HICP). The latter is compiled on a common basis across the European Union. The main difference between the CPI and the HICP is that the latter excludes mortgage interest costs. The CPI fell by 5.9 per cent in the twelve months to August while the HICP fell by 2.4 per cent over the same period. Most of the difference can be explained by changes in mortgage interest rates.

The CPI basket is based on average consumption patterns so price changes for particular individuals and households will invariably differ from the national average. The CSO does not publish indices by income decile or social group. Nevertheless, I would like to point out to the Deputy that prices of a wide range of goods and services have fallen on a year-on-year basis, not just mortgage interest. This is supporting disposable incomes right across society and not just for mortgage holders.