Consumer prices fall 1.7 per cent in 12 months

Consumer prices fell by 1.7 per cent in the year to February, according to new figures from the Central Statistics Office, marking the second month in a row of deflation.

Consumer Prices as measured by the CPI, decreased by 0.4 per cent last month compared to an increase of 1.2 per cent in February 2008.

As a result of the decline, prices on average were 1.7 per cent lower in February, the lowest level recorded since the first quarter of 1960.

The most notable changes over the year were in housing, water, and fuel costs which fell by 12.6 per cent primarilty as a result of reductions in average mortgage interest repayments and lower private rents.

The cost of clothing and footwear fell 11.3 per cent due to a recovery in prices following the traditional January Sales.

Transport costs also declined over the year by 4.8 per cent, the figures show.

Over the year to February, clothes and footwear prices rose by 7.5 per cent while the cost of furnishings and household equipment increased 1.7 per cent.

Increases were also recorded in the areas of education, health and alcohol and tobacco.

The EU Harmonised Index of Consumer Prices (HICP), which excludes mortgage payments, increased by 0.2 per cent in February compared to an increase of 1.2 per cent for the same month a year ago. As a result, Consumer Prices, as measured by the HICP, decreased from 1.1 per cent in January to 0.1 per cent in February.

January 2009 marked the first time that the annual rate of inflation in the Republic had fallen in almost 50 years. Prices in were, on average, 0.1 per cent lower in the month than in January 2007.

"While an extended period of deflation would be damaging for the Irish economy, the general feeling among analysts is that the current sharp fall in the consumer price index is primarily a result of unprecedented interest-rate cuts and lower energy prices. Still, it would be wrong to become complacent on the deflation issue," said economist Alan McQuaid from Bloxhams.

"Although deflation has taken hold for the time being, and the headline CPI could fall by as much as 3 per cent on average in 2009, we don’t see it becoming deeply embedded in the financial/economic system as it has done in Japan. The global stimulus packages will in our view eventually be inflationary, pushing up world prices, though that is unlikely to happen until 2010 at the earliest," he added.

Dr Ronnie O'Toole, chief economist with National Irish Bank, said the CPI is likely to fall by 3 per cent by summer, with the average rate of fall for the year of 2.2 per cent.

"The fall in Irish inflation relative to other Euro zone countries should be seen as a welcome correction in cost levels, after a number of years when the booming property sector drove prices up faster than in other European countries," said Dr O'Toole.

"If negative inflation remains located in those economies with the greatest need to adjust right now such as Ireland - and does not became entrenched in the broader European economy - it will be a very positive development, providing a competitiveness fillup for the Irish economy," he added.