Rate of deflation deepens to 5.4% as retailers cut prices

PRICES FELL again in June, deepening Ireland’s annual rate of deflation to 5.4 per cent, as retailers slashed prices in a bid to persuade consumers to spend.

New figures from the Central Statistics Office also show that price falls in Ireland are racing ahead of average deflation in the euro zone, as the economy weakens at an unprecedented pace. The EU harmonised index of consumer prices, which excludes mortgage interest, fell to an annual rate of -2.2 per cent, compared to a European average of just -0.1 per cent.

Although cuts in mortgage interest rates remain the biggest drag on the consumer price index, prices are now falling across most sectors of the economy.

There was a 2.6 per cent fall in clothing and footwear prices in June, suggesting retailers made an early start to the summer sales.

As supermarket price wars heated up, there was a 0.9 per cent monthly drop in food prices, taking the annual rate of food deflation to 3.3 per cent – the biggest rate of food deflation in years.

The rising price of crude oil on global commodity markets was reflected in the higher cost of petrol and diesel in June. Petrol prices rose 5.1 per cent last month and diesel prices rose 2.3 per cent.

Mortgage interest costs fell 5.7 per cent in June and have fallen 46 per cent in the past 12 months as a result of rate cuts by the European Central Bank.

“Given the high level of indebtedness of Irish households, the effects of this cannot be underestimated, and has clearly provided some relief to disposable incomes that have come under strong pressure over recent months,” said Deirdre Ryan, economist at Goodbody Stockbrokers.

But Sinn Féin finance spokesman Arthur Morgan warned that, as prices excluding mortgage interest were only falling by 1.6 per cent annually, wages could not be cut “without risking a complete collapse in consumer spending”.

Fine Gael finance spokesman Richard Bruton and small business group Isme criticised the Government for failing to control public-sector costs.

Health prices are still rising at an annual rate of 3.4 per cent, while education prices are up 4.5 per cent and communication prices up 0.9 per cent. Mr Bruton said these rates of increase were ahead of the euro-zone average.

Bloxham economist Alan McQuaid said deflation was a bigger threat to the euro-zone economy than inflation. The risk posed by a sustained period of deflation is that falling wages and company profits will increase the real value of existing debts.

“Given that private-sector indebtedness is equal to around 175 per cent of GDP [gross domestic product], well above the euro-zone average of 98 per cent, a period of deflation could have a particularly negative impact on the Irish economy,” Mr McQuaid said.