Inflation falls to 12-year low of 1.1% in December

The annual rate of inflation dropped to a 12-year low of 1.1 per cent in December as the cost of mortgage repayments and fuels declined.

This compares to an annual inflation rate of 2.5 per cent in November. December saw the largest monthly reduction - of 1.2 per cent – since monthly records began in 1997.

The average annual rate of inflation last year was 4.1 per cent. This compares to a rate of 4.9 per cent for 2007 and 4 per cent for 2006. The last time the annual inflation rate was at 1.1 per cent or lower was August 1997.
June and March last year saw the highest rate of inflation at 5 per cent while December recorded the lowest rate of inflation.

Consumer prices have now fallen by an average of 2.3 per cent in the final three months of 2008 the steepest quarterly fall in living costs for 61 years. Some economists believe Ireland's overall inflation rate is about to turn negative.

Pat McArdle, Ulster Bank chief economist, said he expected inflation to turn negative this month and remain so for the rest of the year as further interest rate cuts are introduced.

He believes the decline in inflation to "bottom out" at minus 3.5 per cent next Autumn and run at an average of minus 2.5 per cent for the year.

According to Central Statistics Office (CSO) figures published this morning prices for housing, water, electricity and gas declined by 4.4 per cent last month while transport costs were 2.2 per cent lower, thanks mainly to a fall in oil prices.

Crude oil prices have dropped around 75 per cent since reaching a peak of $147 in July and inflation is expected to ease further in the coming months as lower raw material costs and falling consumer spending undermine companies’ scope to raise prices.

Last month diesel prices declined 9.6 per cent, petrol prices by 8.9 per cent and air transport costs by 10 per cent. There were sharp decreases in the price of home heating oil, which fell almost 17 per cent last month.
The European Central Bank has lowered its key lending rate by 225 basis points to 2 per cent since early October following a further 50 basis points cut today.

Mortgage interest payments were 8.1 per cent lower in December compared with November as a 0.5 per cent interest rate cut took effect. Rents however, increased marginally last month.

The EU harmonised index (HICP), which removes the cost of mortgage repayments, fell to 1.3 per cent in December from 2.1 in November.

Two categories of goods recorded negative inflation last year; clothing and footwear prices which fell 4.9 per cent in the year to December and household equipment prices which were 1.6 per cent lower.

Fine Gael finance spokesman Richard Bruton said although Irish inflation was now the lowest for a decade, State-supplied services remained among the most expensive country in the euro area.

"Ireland needs lower prices to recover our competitiveness and trade our way out of recession," Mr Bruton said.
"But while desperate businesses are being forced to cut their prices, the Government continues to operate in a parallel universe, with the prices of education, energy, health services, public transport and other areas controlled by Government continuing to rise.

Health costs increased by 5.8 per cent over the last 12 years while education costs grew 5.7 per cent over the same period.

“The 1,900 redundancies at Dell and the loss of 510 jobs a day in recent months shows how this Government’s botched management of our cost competitiveness is destroying jobs and entire communities,” Mr Bruton said.

The Fine Gael TD called for a freeze in public pay, increments and bonuses for the public sector to deal with the recession but said this must be matched by a freeze in all Government charges and levies, and a tougher approach to rip-offs.

The Irish Small and Medium Enterprises Association (Isme) welcomed the cut in inflation but warned the headline rate was not reflective of what was happening in the market place.

Isme chief executive Mark Fielding said: “The sharp reduction in inflation over the last number of months is primarily due to a reduction in oil prices and mortgage rates, with little to do with any government policy.

“From an SME perspective, we have yet to witness the benefits from the reduction in inflation due to the high level of business costs.” He said Irish labour costs were still growing at over twice the rate of European competitors, with energy costs among the highest in the Western world.”

“We need to dramatically cut the costs of doing business in Ireland. This includes scrapping the national pay agreement, forcing sharp reductions in electricity and gas and ensuring that there are no increases in local charges to businesses," the Isme chief said.