Irish inflation edges up to 0.3% but threat of deflation lingers

Latest CSO data suggest education, alcohol and tobacco among the main drivers

A period of deflation or negative price growth has been identified as a serious risk to Irish economic recovery.  Photograph: Krisztian Bocsi/Bloomberg

A period of deflation or negative price growth has been identified as a serious risk to Irish economic recovery. Photograph: Krisztian Bocsi/Bloomberg

Thu, May 8, 2014, 16:30

EOIN BURKE-KENNEDY

Inflation edged up to 0.3 per cent last month, with higher prices for education, alcohol and tobacco among the main drivers.

However, the latest consumer price index, compiled by the Central Statistics Office (CSO), suggests inflationary pressure in the economy remains weak.

The CSO figures indicated the average basket of consumer goods and services in April was 0.3 per cent higher than a year earlier, up from the 0.2 per cent rate recorded in March, but still below the euro zone average of 0.7 per cent.

A period of deflation or negative price growth could hamper Ireland’s recovery, as it makes debt more difficult to service.

A breakdown of the CSO’s index showed average education costs rose by 4.5 per cent year on year, mainly as a result of the recent hike in college fees.

Alcohol and cigarette prices were also stronger, rising 3.7 per cent over the past 12 months, reflecting increases in excise duty announced in the last budget.

Prices in the CSO’s miscellaneous goods and services section, which includes a range of items from hairdressing to financial services and insurance, rose by 3.2 per cent year on year.

Restaurant and hotel prices also rose by 2 per cent.

Conversely, the average cost of clothing and footwear fell by 3.7 per cent, while the cost of communications, which covers phone bills, dropped by 3.3 per cent.

The figures also showed prices for household equipment and routine house maintenance fell by 3.1 per cent.

In addition, the price of food and non-alcoholic beverages being sold in shops and supermarkets fell by 2.1 per cent year on year.

The CSO said the divisions which caused the largest downward contribution to prices over the year were food and non-alcoholic beverages; clothing and footwear; and household furnishing and maintenance.

This reflects the relatively weak level of consumer demand on the high street, and possibly discounting by retailers.

Davy stockbrokers said headline inflation has been largely depressed by external factors, namely ECB rates and oil prices.

It noted that energy prices were down 2.2 per cent in the year to April, while mortgage interest fell 11 per cent.

If these factors were excluded inflation would put inflation at 1.3 per cent - the fastest rate of growth since January last year, the brokerage said.

“We expect the inflation rate to gradually pick up in the near term as the economy recovers but to remain below 1 per cent for most of 2014.”

“The bottom line is that demand in the economy is not quite as weak as the headline inflation rate suggests,” it said.

At the moment, the local property tax is not included in the CSO’s consumer price index.