Consumer prices fall 3.1%

Consumer prices fell 3.1 per cent in the year to March, as falling prices for clothes, housing and food contributed to deflation, new figures from the Central Statistics Office showed today.

However, the rate of deflation continued to ease, falling from 3.2 per cent a month earlier. Deflation peaked at 6.6 per cent in October 2009, and since then the rate of decline has fallen, recording a 3.9 per cent drop in January.

Consumer prices rose 0.1 per cent compared to February, while the EU Harmonised Index of Consumer Prices (HICP) fell 2.4 per cent year on year during the month.

The consumer price index (CPI) measured significant decreases in clothing and shoes, which fell 13.7 per cent compared to a year earlier. Meanwhile, prices for housing, water, electricity, gas and other fuels were down 9 per cent over the year.

Prices for services were down 2.8 per cent in the year, while the cost of goods fell by 3.3 per cent.

Food and drink prices also dipped, reducing 7.8 per cent. Furnishings, household equipment and

routine household maintenance were 5.5 per cent cheaper compared to March 2008, the survey showed.

Retail Ireland said retailers had cut prices over the last year to save their businesses by trying to attract more customers.

"Retailers have cut their overhead costs to the bone. Their ability to deliver further price cuts to consumers depends on the willingness of landlords to reverse huge rent increases, applied in recent years under upward only rent review clauses," said director Torlach Denihan.

However, these declines were offset by a price hike of 8.7 per cent for education, while transport costs were up 5 per cent.

Prices were lifted compared to February as prices for clothing rose 1.9 per cent as the effect of the January sales was shaken off, and a rise in petrol and diesel prices pushed the cost of transport up. Prices rose for hotel accommodation over the month.

Month on month, education costs were down 1.7 per cent as the introduction of the early childhood care and education scheme reduced costs.

"The extent of the downward price pressure stemming from other areas was larger than we had been expecting," said Ulster Bank economist Lynsey Clemenger. "In particular, the reduction in pre-school education costs in playschools and crèches, as a result of the introduction of the Early Childhood Care and Education scheme, had a significant bearing on the more muted than expected rise in prices last month."

The CPI excluding mortgage interest increased by 0.1 per cent in the month and was down by 2.2 per cent in the year.

Ireland is only one of five countries within the 27-member EU area to remain in deflationary territory.

"While Ireland needs to make significant downward wage/price adjustments to make itself more competitive and return the economy to sustainable growth, the last thing we need is to get stuck in a deflationary spiral like Japan, which will do more damage than good in the medium- to long-term," said Bloxham's chief ecxonomist Alan McQuaid.

"Thankfully, we don’t think that will be an issue. Indeed, the latest Reuters monthly Irish economists’ poll sees the CPI returning back to positive year-on-changes by the fourth quarter this year, though it could be sooner than that the way things are going, especially if the banks keep pushing up mortgage interest rates and global oil prices continue to rise."

He said worries about asset price bubbles and the inflationary threat they might pose were "premature".

"When thinking about the outlook for inflation we would continue to give far more weight to real world factors, notably the still high levels of unemployment and ample spare capacity," he said.

"It is also worth noting too that the trends in broad money and credit aggregates suggest that inflation is unlikely to be a cause for concern anytime soon."

Looking ahead to the rest of the year, Goodbody Stockbrokers said the rate of deflation would slow, and forecast for a 1.5 per cent decline in CPI in 2010.

"By year end the annual CPI rate will be edging back into positive territory and we have very modest inflation of 1 per cent forecast for 2011, mainly resulting from higher interest costs," said analyst Deirdre Ryan.

"Nevertheless, this will see Ireland narrowing the price gap further versus Europe in the quarters ahead."