Prices fall by over 4.5% as deflation takes its toll

PRICES FELL by 4.5 per cent in 2009, the steepest decline seen in the Irish economy in almost 80 years, according to new figures from the Central Statistics Office (CSO).

After a year of intense deflation across most sectors of the economy, the cost of a typical basket of consumer goods and services continued to fall in December, as retailers began pre-Christmas sales and supermarkets slashed alcohol prices.

After a 0.5 per cent decline in prices last month, prices are now falling at an annual rate of 5 per cent, the Consumer Price Index (CPI) shows. However, the pace at which the Irish economy is deflating has eased in recent months.

During the month of December, clothing and footwear prices fell 3.6 per cent, while supermarket price wars and attempts to stave off cross-Border shopping led to a 3.4 per cent decline in alcohol. This included an 8.6 per cent monthly price drop on spirits.

The decline in alcohol prices does not include the impact of reductions in excise duty introduced in the Budget.

The Harmonised Index of Consumer Prices (HICP) – a measure that excludes mortgage interest and is the standard measure of inflation across Europe – is now down 2.6 per cent on an annual basis. This compares to inflation of 0.9 per cent across the euro zone.

Yesterday, European Central Bank (ECB) president Jean-Claude Trichet said he expected euro-zone inflation to stay at around 1 per cent in the near term. The lack of inflation threats on the horizon indicates that the ECB will keep interest rates on hold until the latter part of 2010.

At home, economists said they expected another year of deflation in the Irish economy. Ulster Bank economist Lynsey Clemenger said she expected prices would fall at between 1 and 1.5 per cent in CPI terms, while Goodbody Stockbrokers economist Deirdre Ryan said the full-year fall in prices in 2010 would be “close to 1 per cent”.

However, moves by lenders to increase interest rates on variable-rate mortgages mean that mortgage interest costs may put upward pressure on the CPI this year, rather than acting as a drag as it has in recent times. As a result, HICP inflation may increase at a higher rate than CPI in 2010.

Food prices are now falling at their fastest pace in at least 13 years, declining by 8.1 per cent in the year to December. Meanwhile, the price of cars fell by 2.3 per cent in December, which Ms Clemenger said was indicative of the ongoing stress in the Irish motor industry.

The Irish economy has not experienced such deep deflation since 1931, a year in which prices plunged 6.4 per cent.

The average decline in prices of 4.5 per cent last year sharply contrasts with years of high inflation during the boom and at the start of the recession. In 2007, prices rose 4.9 per cent. This was followed by a 4.1 per cent increase in 2008.

The Small Firms Association (SFA) said the decline in prices was evidence that businesses were attempting to regain competitiveness. However, SFA director Patricia Callan warned that “a continuing significant downward trend” could result in a “spiral of deflation”.

Business group Isme said an immediate review of all State-influenced business costs was required, as many of these costs were still increasing.