THE ECONOMY’s rapid swing from inflation to deflation continued in March, with the Consumer Price Index (CPI) falling 2.6 per cent on an annual basis, according to the Central Statistics Office (CSO).
Although cuts in mortgage interest rates remain the biggest drag on the cost of living, the Harmonised Index of Consumer Prices (HICP), the EU-wide measure of inflation that excludes mortgage interest, is also negative.
The HICP is down 0.7 per cent annually, giving Ireland the lowest inflation rate in the EU. This is the first instance of HICP deflation in Ireland since the index began in 1996. However, the costs of healthcare, education, electricity and gas, restaurants and hotels, communications and insurance are still increasing on an annual basis.
Fine Gael finance spokesman Richard Bruton said rising costs in sectors where the Government dictates pricing policy was evidence that “the Government rip-off of families continues”.
Small business group ISME warned that the fall in prices “needs to be reflected in business costs, particularly those influenced by the State”.
ISME head of research Jim Curran said small businesses were not yet witnessing any benefits from the reduction in the headline rate of inflation due to the high level of business costs.
“This is completely unacceptable,” he said. “If anything, the Minister scored an own goal in the recent Budget, exacerbating the problem with ludicrous increases in diesel and the insurance levy.”
On Tuesday, Minister for Finance Brian Lenihan told the Dáil that he expected prices to fall by close to 4 per cent this year, which he said would “mitigate” the effects of falling wages and higher taxes. Economists have forecast that the package of tax hikes in the supplementary Budget will extend Ireland’s dive into deflation, with further interest rate cuts and retreats in household energy prices expected in the coming months.
Goodbody economist Deirdre Ryan said “clear downward momentum” in prices was evident and that the tax hikes would “further depress consumer spending in the near term”.
Pat McArdle, economist at Ulster Bank, said the CPI would soon be showing rates of decline in excess of 5 per cent and would have an average deflation rate of 3.9 per cent in 2009.
“This will alleviate some of the pain being felt by those who are suffering from income cuts, not to mention the harsh taxation rises in the Budget,” he said.
But there were some surprising elements to the monthly data. Although clothes and furniture prices are falling on an annual basis, prices in these two categories surged in March compared with February.
“This is really strange, but may represent attempts by distressed retailers to recover some lost margin after years of falling prices. If so, they seem doomed to failure, given the weakness in the broader economy,” said Mr McArdle.
Prior to January, the last time there was an annual rate of deflation in Ireland was in 1960, while the last time prices were falling so steeply was in August 1933.
