PRICES ARE falling at the steepest rate since 1933, according to new data from the Central Statistics Office (CSO), suggesting that the economy is sinking further into a deflationary slump. The cost of a typical basket of goods and services was 2.6 per cent lower in March than it was a year ago, according to the consumer price index (CPI).
Sharp reductions in mortgage interest rates are largely responsible for the decline; however, the drops in prices are becoming more widespread across the economy. Food prices have fallen 0.5 per cent on an annual basis. Clothes are almost 9 per cent cheaper than last year and petrol prices are down 14 per cent.
However, many prices are still climbing on an annual basis, with insurance premiums up 19 per cent, education costs up 5.5 per cent and the cost of hospital services up more than 9 per cent. Economists predicted yesterday that the package of tax hikes in the supplementary Budget would deepen Ireland’s deflation rate in the months ahead, as falling incomes across the economy put downward pressure on prices.
“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,” said Ulster Bank economist Pat McArdle.
The harmonised index of consumer prices (HICP), the EU measure of inflation that excludes mortgage interest, was negative for the first time in its history, showing an annual deflation rate of 0.7 per cent. Ireland now has the lowest rate of inflation in the EU, a trend that the Government hopes will improve the weakened competitive position of Irish exporters.
Minister for Finance Brian Lenihan said on Tuesday the adjustment in prices would “sow the seed for export-led economic recovery”.
The Government forecasts that Ireland’s deflation rate will average at 4 per cent in 2009. Although falling prices may be welcomed by consumers, there are fears that sustained deflation will increase the “real” value of household debt and keep the country poorer for longer.
A quick search through The Irish Times archive shows that in August 1933, the last time that prices were plummeting as fast, weak wheat and cotton markets were reported to be proving a “disturbing influence” on the US stock markets, which were then embroiled in one of the most famous of all deflationary slumps: the Great Depression. In August 1933, department store Brown Thomas advertised “temptingly low prices” in a bid to convince people to shop. Yesterday, it implored consumers to “blow the budget” by holding an Easter “guerilla” sale.
