FOR HOUSEHOLDS facing higher unemployment as economic activity declines and consumer spending dips, falling prices offer some consolation.
A lower inflation rate in Ireland and the wider euro zone, reflecting weak consumer demand and collapsing commodity prices, should make it easier for the European Central Bank to cut interest rates again, perhaps next month. Lower rates would boost disposable income and offer hard-pressed consumers some relief. In presenting the Budget last week, the Minister for Finance forecast a major easing of inflationary pressures next year, with prices rising by 2.5 per cent.
However, the Government could have been more ambitious. The predicted rate of inflation would have been even lower were it not for an increase in indirect taxes in the Budget, with the top VAT rate raised marginally and excise duties increased. The tax increases will further depress consumer spending and add to inflationary pressures but these are offset by an economy in recession. Ireland has had one of the highest inflation rates in the euro zone in recent years. And the Budget presented an opportunity to regain some lost price competitiveness. Regrettably, the option was not exercised.
The fall in food and fuel prices reflects a 45 per cent drop in world commodity prices since July. As the global economy moves closer to recession, this deflationary process is likely to continue. The wholesale price of some milk products on the domestic market fell by up to 10 per cent last week while a barrel of oil has halved in price in three months. However, consumers have yet to see lower crude oil prices fully reflected in lower domestic energy prices. Since oil is priced in dollars, the dollar's recent strength has meant the oil price fall in euro has not been as dramatic. And as the Government added 8 cent to the cost of a litre of petrol, higher taxes have offset the lower oil price.
Nevertheless, the sharp drop in commodity prices should result in lower prices generally. As the euro strengthened against sterling in recent months, Irish consumers did not secure the full benefit of the currency appreciation. Many retailers selling UK goods failed to pass on the saving in the form of lower prices, as surveys by the National Consumer Agency (NCA) showed. In the absence of price controls, detailed price comparison surveys are one way of achieving realistic pricing for consumers. The other, as the NCA has said, is for consumers to show vigilance and to vote with their feet and their wallets.