The annual rate of inflation eased to 2.2 per cent in January, new data from the Central Statistics Office showed today.

The dip comes after a reading of 2.5 per cent in the year to December and compares to a fall of 0.2 per cent in January 2011.

The decline was driven in part by a fall in the price of household furnishings and equipment, which was 1.9 per cent lower than a year earlier. Clothing and footwear also showed a decline, with prices dipping by 1.1 per cent. The cost of recreation fell by 1 per cent.

The declines were offset in part by an 8.9 per cent rise in the cost of education compared to last year and a 6.7 per cent rise in housing and utility prices. In the latter case, increases in mortgage interest repayments contributed to the rise.

"The fall in inflation, despite the VAT rise in January, is a welcome development for households," Davy's David McNamara said. "Continued declines in the index should ease pressure on households' real incomes in 2012."

On a monthly basis, prices fell by 0.5 per cent, fuelled by a 10.7 per cent decline in costs for clothing and footwear, and a 2.5 per cent fall in household equipment costs as seasonal sales affected prices.

The cost of housing and utilities fell by 1.6 per cent as lower mortgage interest brought down costs.

Alcoholic drinks and tobacco rose by 3.5 per cent in the month as special offers in supermarkets and off-licences ended and tobacco prices rose.

Transport costs also rose during the month, with higher petrol and diesel costs leading to a 1.2 per cent rise overall. Motor tax also increased during the month.

Elsewhere, the EU Harmonised Index of Consumer Prices, which excludes items such as mortgage interest, fell by 0.4 per cent in the month, and rose by 1.3 per cent year on year.

Retail Excellence Ireland (REI) said consumers were seeking out lower prices, moving away from brands in many markets.

“In a nutshell, consumers are seeking out and responding to lower prices, and when value is discovered customers are willing to buy more, thus driving 'items per sale' rates and enhancing average transactional values,” said David Fitzsimons, REI chief executive.

“The Government and local authorities can help to protect retail jobs by reducing commercial rates. The small reductions passed on by some of the country’s local authorities are welcome. However, given the over 30 per cent fall in the level of retail sales since 2008, more significant reductions are required if further job losses are to be avoided.”

The Irish Small and Medium Enterprises association (Isme) called for the Government to prioritise cost competitiveness, saying increases in Government-controlled costs would have a devastating effect on small businesses.

“The small business sector does not have the price-setting ability to increase prices to compensate for rising State-influenced costs, thereby undermining competitiveness and leading to job losses and company closures,” said Isme chief executive Mark Fielding.