The Central Bank has said high prices in the economy over the past few years have left a legacy of damage to our competitiveness.
The bank has welcomed the recent narrowing of the gap between Ireland's inflation rate and the level of price rises in our major trading partners. But it says the damage done by high inflation over the past few years is the main blot on the horizon for the Irish economy.
The bank says we have not only lost our competitive edge but in absolute terms the price level in Ireland is now 12% above the EU average.
It says the Irish industrial sector will not automatically move to a higher level on the so-called value chain. It says an overall planning approach is needed.
On property prices, the Central Bank has asked why house prices have increased by 300% over the past decade while building costs have increased by only 80%.
The bank says the difference, which has gone into site costs and builders' profits, may be as a result of some distortions in the market which need to be explored further.
It believes house prices are currently overvalued by as much as 10%, and that house price increases will be down to single figures next year.
Figures published in the bank's Winter Bulletin show that since joining the EMU in 1999 Ireland's competitiveness has disimproved by 14%. The figures come in the bank's Real Trade Weighted Competitiveness Index.
The bank said that until the middle of 2002, the effect on competitiveness of higher inflation in Ireland, compared with countries outside the euro area was more than offset by the weak exchange rate of the euro. It said that this cushion has been removed by the strengthening of the single currency since then, and the price level in Ireland is now 12% above the EU average.
In its Winter Bulletin the bank that said it was worried that wage costs in several sectors have shown signs of picking up again. It said adverse swings in the exchange rate of the euro remains another major risk to competitiveness.
Compared with other euro area countries, a high proportion of Ireland's external trade is with countries outside the euro area, so the US dollar and sterling exchange rates are of particular importance.
The Central Bank forecast two inflation measures, the CPI (consumer price index) and the HICP (harmonised index of consumer prices), are both expected to increase by about 2.75% in 2004. It said: 'The objective in Ireland must be to continue the recent trend in declining inflation rates so as to reach the 2% target rate set by the ECB for the euro area.'
