Inflation at lowest in over a decade as prices fall sharply

THE ECONOMY has moved a step closer to deflation, with a sharp drop in the price of goods and services in December taking the annual rate of inflation to its lowest point in over a decade.

Consumers benefited from lower petrol, diesel and home heating oil prices, as well as a 10 per cent plummet in air fares last month as global crude oil prices fell, while the pre-Christmas discounts offered by struggling retailers led to a 2.7 per cent monthly fall in clothes prices.

The overall cost of living as measured by the Central Statistics Office (CSO) Consumer Price Index fell 1.2 per cent in December. This dragged the annual rate of inflation down from 2.5 per cent in November to just 1.1 per cent last month.

Inflation is likely to fall further in the months ahead as homeowners see their mortgage repayments fall by €50-€150 as a result of the European Central Bank half-point cut in rates. Further cuts in fuel prices are also expected.

Although some consumers benefit from the easing of inflationary pressures and cut in interest rates, they are also signs of the extent to which the Irish and European economies have deteriorated in recent months.

While householders' mortgage burdens may ease as a result of the interest rate cut, lower inflation makes it less likely that they will receive increases in their pay.

Ulster Bank chief economist Pat McArdle said he expected the rate of inflation to turn negative to deflation next month. He forecast it would remain negative for all of 2009, bottoming at -3.5 per cent next autumn, giving an average fall of 2.5 per cent in 2009.

Alan McQuaid, economist at stockbrokers Bloxham, said the steep fall in prices should, "in theory at least", boost consumer spending, while Goodbody Stockbrokers economist Dermot O'Leary said that deflation was Ireland's "most potent tool" for increasing the competitiveness of the Irish economy.

The headline rate of inflation has fallen almost four percentage points in the past six months from a high of 5 per cent back in June 2008. However, health, education, energy and public transport prices continue to rise sharply, prompting the Opposition to criticise the Government's handling of the economy.

"While desperate businesses are being forced to cut their prices, the Government continues to operate in a parallel universe," said Fine Gael finance spokesman Richard Bruton.

Business groups welcomed the drop in inflation, but said the figures showed the pressures facing the retail sector. Citing the 6.5 per cent annual drop in clothing and footwear prices and the 1.3 per cent drop in furnishings and household equipment, Small Firms' Association director Patricia Callan said: "We expect to see the implementation of short-time layoffs and redundancies as a result."

She called on the Government to impose a price freeze on all publicly administered services for 2009.

The EU Harmonised Index of Consumer Prices (HICP), which is used to compares price trends across Europe, fell to 1.3 per cent, down from 2.1 per cent in November. Having seen prices rise at higher than the EU average in recent years, Ireland now has one of the lowest inflation rates in the euro zone.