Deflation at level not seen since 1933

THE ANNUAL rate of deflation rose to 4.7 per cent in May, a level not seen since 1933, new data from the Central Statistics Office (CSO) shows. Prices have been falling since January and the cost of living, as measured by the consumer price index (CPI), declined by a further 0.5 per cent last month.

Until May, the main deflationary force at play has been the reduction in mortgage interest costs. Interest rates have plummeted as a result of a series of rate cuts by the European Central Bank (ECB) since last October.

Although the ECB slashed rates to a record low of 1 per cent in May, Ulster Bank economist Pat McArdle noted that lower interest rates were no longer the key driving force behind price falls. “Mortgage rates did go down but falls in a range of other items, notably food, electricity, gas and rents were more influential,” Mr McArdle said.

While mortgage interest repayments declined by 4.2 per cent in May, utility costs fell by 6.5 per cent.

“We can no longer say that price falls reflect interest rates only,” he added.

This was borne out by the fact that the monthly EU Harmonised Index of Consumer Prices, which strips out the effect of mortgage rates, moved into negative territory in May, falling 0.4 per cent in the month.

Some price increases were evident in May, however. Following heavy discounting by retailers in April, the cost of clothing and footwear rose by 0.8 per cent as prices recovered last month following the sales. Transport prices were pushed up 0.4 per cent by increases in petrol and diesel costs.

Alan McQuaid, economist with Bloxhams, warned yesterday that given the anecdotal evidence of wage cuts in parts of the private sector, Ireland could be about to enter a wage-price deflation spiral, which “could have some pretty nasty consequences for the Irish economy”.

However, NCB stockbroker economist Brian Devine argued that as a small open economy in a monetary union, Ireland does not have to worry about a truly deflationary spiral “providing the euro area does not enter one”.

Most economists agreed that fall in prices and wages would help to boost Ireland’s competitiveness.