Further deflation as prices fall 5.9% in year to July

Prices declined again last month to bring the annual rate of deflation to 5.9 per cent, according to new figures from the Central Statistics Office (CSO).

The CSO reported that prices declined 0.8 per cent in July, helped by a 9.9 per cent decline in clothing and footwear prices, suggesting retailers were discounting heavily during the summer sales. July was the seventh month in a row in which the cost of living has declined and the last time prices fell at this rate was in 1931.

The decline in living costs, coupled with better than expected data from the US overnight and figures showing the emergence of France and Germany from recession today has prompted NCB stockbrokers to upgrade its forecasts for the Irish economy.

Brian Devine, economist with NCB, said the forecast for this year was a contraction in growth of 7.6 per cent, compared with earlier predictions of 8.1 per cent.

Next year NCB now expects the economy to decline 2 per cent rather than the 3.1 per cent forecast earlier.

"While we are upgrading our GDP figures we do not see the trajectory of the recovery being any different than previously – the bottom in the economy will be formed in the first half of 2010, with sustainable growth not expected until the second half of 2010".

According to the CSO transport costs rose last month as airfares increased 12.9 per cent. Diesel prices rose 0.4 per cent last month while petrol prices dropped 0.6 per cent.

Over the last year, as oil prices have fallen from a record high of $147 per barrel, transport costs have declined 6.2 per cent.

With supermarket engaged in price-cutting campaigns, food prices declined by 1.3 per cent last month bringing the annual decline to 4.2 per cent.

Although most categories of foodstuffs have declined, tea prices have risen 0.9 per cent over the last year, while eggs are 1.8 per cent more expensive and prices for beef products are up 1.2 per cent.

Mortgage interest costs fell 0.5 per cent in July and have fallen 47.5 per cent in the last year due to a series of rate cuts by the European Central Bank. When the impact of mortgage interest costs is excluded the annual fall in prices was 2.6 per cent.

Health is one of the sectors where prices are still rising, and over the last year these have risen 3.4 per cent. Although education costs fell marginally last month they remain up 4.4 per cent higher than 12 months ago.

The under-pressure hospitality sector imposed further price cuts last month. Accommodation costs fell 3.2 per cent last month to bring the annual fall to 16.2 per cent.

Prices in restaurants eased down 0.4 per cent last month but remain up 0.2 per cent over the year.

Beer and wine prices fell 0.1 per cent last month but are up 2.4 per cent and 1.2 per cent compared with July 2008.

Fine Gael deputy leader and finance spokesman Richard Bruton said prices in Government controlled areas were soaring while those in all areas were falling.

"As we have seen time and time again, Government controlled prices are part
of the problem. Despite the falling prices across all sectors, the price pattern in sectors controlled by Government is very disappointing."

He said public transport and hospital charges had both risen by 9 per cent, while electricity costs were up 5 per cent and education costs by 4 per cent.

Mr Bruton called on the Government to introduce a competitiveness action plan to strengthen the country's export base.

Dermot O'Leary, chief economist with Goodbody Stockbrokers said interest rate falls had accounted for around two-thirds of the price declines.

He said the retail sector had been aggressive in its response to the changed economic environment with a "mini-price war ongoing" in this sector.

"The drop in prices must be having some influence on the ability of consumers to deal with falls in nominal incomes."

Isme, a representative body for small and medium sized enterprises, said the price differentials between private and public sector confirmed the existence of a “parallel universe”.

Chief executive Mark Fielding said the Government had to reduce the cost of public services or the competitiveness of Irish business would be decimated.

“Today’s figures confirm the existence of a “parallel universe”, whereby prices in the private sector have been continuously reducing since late last year but the cost of public services continues to increase”, he said pointing to the health, education and local government charges.

Business lobby group Ibec said it was vital competitiveness be improved through lower costs and wages for the economy to recover.

Fergal O'Brien, senior economist with Ibec, said: "Consumer purchasing power has been given a significant boost by falling prices in recent months and there is some evidence that this is supporting the volume of retail sales."