Inflation falls to 0.3% in July as threat of deflation looms

Inflation fell back to 0.3 per cent last month, with lower prices for clothing, footwear and household furnishings among the main drivers.

The latest consumer price data from the Central Statistics Office (CSO) suggest inflationary pressure in the Irish economy remains extremely weak.

The figures indicate an average basket of goods and services in July was just 0.3 per cent higher than a year earlier, down from the 0.4 per cent rate recorded in June, and well below the European Central Bank’s target rate of 2 per cent.

The country’s anaemic level of price growth has raised the prospect of deflation or negative price growth, which could hamper Ireland’s recovery, as it makes national and household debt more difficult to service.

With deflation, the size of Ireland’s economy, in price terms, shrinks while its debt remains the same, making debt a bigger percentage of gross domestic product.

Aside from debt, falling prices encourage people to put off buying things, weakening the economy further.

Apart from a recent surge in car sales, Irish consumer spending has remained in the doldrums since the crash.

The CSO numbers show consumer prices in July fell by 0.2 per cent on a monthly basis primarily on the back of lower prices for clothes and footwear, which fell by 7 per cent.

There was also a 1.1 per cent decrease in the prices miscellaneous goods and services, which includes a range of items from hairdressing to financial services and insurance, and 1.1 per cent fall in the cost of household equipment and maintenance.

However, transport prices did rise last month linked to higher airfares and higher fuel pricesl, while restaurant and hotel were also more expensive.

On an annual basis, the CSO figures show the average cost of communications, which covers phone bills, fell by 5.1 per cent, while the price of clothing and footwear dropped by 3.6 per cent.

Prices for household equipment and routine house maintenance fell by 3.3 per cent while the cost of food and non-alcoholic drinks dropped by 3 per cent.

Conversely, the cost of education rose by 4.5 per cent on annual basis, mainly on the back of recent increases 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 2.8 per cent year on year.

Restaurant and hotel prices also rose by 2.5 per cent in the past 12 months.

"The muted overall inflationary pressures are continuing to provide respite to Irish consumers, but we note some potential storm clouds on the horizon," Investec economist Philip O'Sullivan said.

He warned that the recent weakening of the euro posed a threat of imported inflation, while a worsening of geopolitical tensions linked to the situation in Ukraine could push up energy prices.

“With the Government dropping hints that it will be looking to ease taxes on incomes in October’s Budget, it could be a case of taking with one hand and giving with the other if these are funded through further hikes in indirect taxation,” he added.

The Irish Small and Medium Enterprises Association claimed the Government’s “complacent stance” on bank credit and the uncompetitive high business costs being borne by Irish SMEs were costing jobs and slowing economic progress.

Chief executive Mark Fielding said the inflation figures did not accurately show the steadily increasing business costs being borne by SMEs, as they are masked in the overall composite figures of all price changes.

“The Governments attempts to generate an export-led recovery are being jeopardised by a lack of bank credit and the high business costs that they impose. While multinationals, which are not dependent on local banks, thrive, the domestic economy is being strangled by a lack of bank credit,” he said.