Dáil Éireann - Volume 481 - 08 October, 1997

Written Answers. - Inflation Forecasts.

45. Mr. O'Shea asked the Minister for Finance the estimated rate of inflation for the calendar year 1997; the extent to which his estimation varies from the estimate at the time of the 1997 budget; the plans, if any, he has to redesign the economic model used for forecasting inflation in view of the consistently wider outlines for the monthly inflation figures than those estimated; and if he will make a statement on the matter. [15690/97]

Minister for Finance (Mr. McCreevy): The latest forecast for inflation in 1997 is about 1 1/2 per cent. The 1997 forecast published in the Economic Background to the Budget was 2.2 per cent. It compares with the post-budget forecast of 2.3 per cent from the Central Bank (March 1997) and 1.8 per cent from the ESRI (April 1997). Forecasts from the major stockbrokers varied from 2.2 per cent to 2.5 per cent.

Ireland is considered to be a textbook example of a small open economy. Because of this it is reasonable to assume that a major determination of inflation is the interaction of exchange rate changes and international inflation. The budget time forecast was based on the assumption that the change in the effective exchange rate during the second half of 1996 would feed into domestic prices during 1997 due to the normal lags associated with the translation of exchange rate movements into prices.

These movements have not been reflected in the consumer price index to date this year. There are a number of possible explanations for this. Greater competition in retailing is undoubtedly playing a significant role in keeping prices down. This is particularly evident in the clothing and footwear sector, where the influx of UK retailers has helped promote greater price competition. Clothing and footwear prices have fallen by no less than 10 per cent in the year to August last. In addition it is possible that some UK exporters may have cut the price of their exports to offset the increased value of sterling. Also some importers may have switched to alternative, cheaper sources for their goods, although we [428] must wait on more substantial CSO trade data in order to verify this.

Our inflation forecasting methodology is kept constantly under review and any necessary adjustment will be made to ensure that the best possible projections are made.