Summer sales see inflation rate dip to 4.4%

Inflation dropped to a four-month low in July as falls in the price of clothing and household goods during the summer sales offset rises in fuel and housing costs.

The annual rate of inflation declined to 4.4 per cent from 5 per cent in June, the Central Statistics Office (CSO) said today.

The drop is a timely boost for the Government and employers involved in the national pay talks. Yesterday private sector unions submitted a pay claim for a wage increase of €30 per week for the lowest paid workers, designed to match annual inflation of 5 per cent.

Sitpu's general president Jack O'Connor said the drop in inflation, while welcome, did affect the union's projection of 5 per cent inflation for the year. "We had factored in some reduction this month but this will be reversed when the August figure emerges because it will reflect the latest European Central Bank increase announced on July 3rd," Mr O'Connor said.

His comments were echoed by Alan McQuaid, chief economist with Bloxham stockbrokers, who said that while the dip was a long-awaited piece of good economic news, a similar fall in July 2007 "didn't last".

"Despite the recent sharp fall in oil prices we still think that inflation is more likely to be running closer to 5 per cent than 4 per cent over the next couple of months".

"It would be foolish to assume that just because prices have fallen sharply in recent weeks that we have definitely seen the peak in oil/food prices in this current cycle. Quite simply, we just don't know . . " he said, cautioning against the Government factoring in the current high inflation rate in the national wage talks.

The main reason for the inflation fall was lower prices for clothing, footwear and household durable goods due to the sales. Prices for a range of foods including breakfast cereals, fresh fruit and vegetables also fell last month .
These falls offset increases in average mortgage interest repayments, petrol, diesel, home heating oil, coal and airfares.

Over the last 12 months prices for housing, water, electricity and other fuels have risen 9.7 per cent rise and food by 6.8 per cent. Clothing and footwear prices declined 5.8 per cent in the 12 months to July, while services inflation over the last year was 4.5 per cent, according to the CSO.

Despite falling oil prices, a 17.5 per cent rise in Irish electricity prices next month and a 20 per cent rise in gas prices in September coupled with higher mortgage interest repayments as the impact of the European Central Bank's interest rate rise in June is passed on to house owners are likely to provide short-term inflationary pressures, according to Mr McQuaid.

Since the survey was carried out on July 8th, petrol prices have dropped 11 per cent on global markets.

Over the longer term the impact of the global credit crunch, falling property prices and high oil prices "will ultimately prove to be deflationary for the world/Irish economy, pointing to a sharp drop in inflationary pressures next year," Mr McQuaid said. 

Last month the most significant price changes were a 10.9 per cent fall in clothing and footwear and a 0.4 per cent easing in food prices.

Davy economist Rossa White said food prices have dropped for two straight months and will fall further. "For example, the end-year price of corn has plummeted by 33 per cent from its high at the end of June", he said predicting inflation will fall to 2 per cent in 2009.

He said the collapse of the pay talks was welcome as there was "no basis whatsoever for wage increases in the face of the rapid deterioration in the labour market, where the unemployment rate will soon be above 6 per cent".

Mr White said it is "incredible to see that health inflation is still as high as 6.2 per cent and education is even higher at 6.4 per cent."

Labour Party enterprise spokesman Willie Penrose also said although the dip was welcome, it was likely to be temporary as the impact of last month's 0.25 per cent rate rise from the European Central Bank has yet to filter through.

"Inflation remains a very significant problem with our rate running well above the EU average and well in advance of the level predicted by the government in the budget", he said.