Rate of deflation at 6.5% - CSO figures

FALLING FOOD and transport prices deepened Ireland’s annual rate of deflation to 6.5 per cent in September, according to latest figures from the Central Statistics Office (CSO).

Consumer prices are now falling at their sharpest rate in Ireland since 1922.

The 0.4 per cent fall in prices last month, which reversed a 0.4 per cent increase in the cost of living in August, prompted calls that deflation should not be used as justification for a reduction in social welfare rates.

Labour Party deputy leader Joan Burton said the fall in the Consumer Price Index, which is partly explained by lower mortgage interest rates, “must not be used as a cynical ploy to pick the pockets of the most vulnerable”, as welfare recipients were less likely to have large mortgages.

“Welfare recipients also tend to spend a bigger proportion of their income out of necessity, so there is a strong economic argument for protecting welfare rates,” Ms Burton said.

September marked a further reduction in food prices, which fell 1.3 per cent and is now declining at an annual rate of 6 per cent.

There was also a sharp drop in the price of air transport, which has fallen 21.7 per cent over the past year as recession forced airlines to slash fares. The decline in tourism has also resulted in lower hotel room rates, which are down 15.6 per cent over the last 12 months, the CSO data show.

The deeper than expected deflation rate underscored fears that the economy may sink into a deflationary slump, whereby prices fall over a sustained period, pushing down wages and increasing the real value of debt.

“The last thing the economy needs at this juncture is to get caught in a deflationary spiral,” said Alan McQuaid, economist at stockbroking firm Bloxham. “However, on the assumption that the global economy picks up and commodity prices rise in the coming months, hopefully that should be avoided.”

Not all prices are falling. Fine Gael deputy leader Richard Bruton pointed to increases in the cost of Government-controlled expenses such as education, health and bus fares, describing it as “the great State rip-off”.

Meanwhile, clothing and footwear prices rose for the second month in a row as retailers ended their summer sales.

However, economists forecast that retailers will be forced to cut margins again in advance of Christmas in order to entice consumers back into the shops and prevent an exodus of shoppers to Northern Ireland to take advantage of the weak sterling.

Employers group Ibec said there had been “aggressive price cutting” by retailers over the past year but, despite lower prices, retail sales remained poor.

Prices have plunged faster in Ireland over the past year than elsewhere in Europe.

The Harmonised Index of Consumer Prices, the EU-wide measure of inflation that excludes mortgage interest, fell 3 per cent in the year to September, compared to an average deflation rate of 0.3 per cent for the euro zone.

Ulster Bank economist Lynsey Clemenger said the widening gap between Irish and EU deflation was welcome, as it suggested the Irish economy was “making considerable progress in improving its competitive position vis-a-vis two of our main trading partners”.

Lower energy prices introduced this month may drag down inflation again in October, but the rate of deflation is then expected to ease.