Economists expect Irish price deflation next year

INFLATION WILL turn to deflation next year, economists predicted yesterday, as the Central Statistics Office (CSO) published figures showing that prices across a range of goods and services are coming down.

With clothes, transport and furniture prices all falling in October, the annual rate of inflation dropped to 4 per cent, down from 4.3 per cent.

The fall in inflation is expected to continue over the coming months as the recent European Central Bank (ECB) interest rate cuts, the impact of a stronger euro and lower oil prices all take effect.

The ongoing retreat of oil prices from a summer spike of more than $150 a barrel meant petrol and diesel prices fell more than 5 per cent last month, while home heating oil was down 11 per cent.

The fall in oil prices, which is the result of lower demand as the global economy teeters on the brink of recession, will eventually translate into lower electricity and gas prices, said National Irish Bank economist Ronnie O'Toole.

Food prices, which were escalating at an annual rate of more than 9 per cent, are now growing at an annual rate of 4.6 per cent, having fallen in October for the fifth successive month. The prices falls are partly the result of cheaper imports from the UK.

Elsewhere, the 2 per cent monthly fall in clothing and footwear prices, which takes annual deflation in this category to 6.8 per cent, was greater than is normal for October, said Ulster Bank economist Pat McArdle, who added that the price falls pointed to ongoing efforts by retailers to bolster sales on the high streets through heavier discounting.

Davy Research economist Rossa White said the CSO's consumer price index would turn negative by May 2009, adding that the average inflation rate in 2009 could be as low as 0 per cent - meaning that each euro earned is worth a full euro in terms of spending power.

"For households, this is welcome respite," he said.

However, there are fears that the recessionary global economy is heading for a sustained period of deflation, which could create a different kind of headache for households as during periods of deflation the real value of debt increases.

"Policymakers need to use every tool at their disposal to prevent this from developing into a dangerous debt-deflation spiral," said Bloxham economist Alan McQuaid.

Fine Gael's deputy finance spokesman Kieran O'Donnell said retailers had passed on discounts from cheaper imports to consumers, but that the Government was "set to take it all back" via higher indirect taxes announced in Budget 2009.

Labour Party senator Brendan Ryan noted that the decrease in the rate of inflation was "a by-product of the Irish economy going into recession" rather than the result of any corrective action taken by the Government.

"Unless the level of inflation is pushed down significantly further, employees will get no benefit from the increases provided for in the new national agreement and most of those on social welfare will simply stand still," he said.