Inflation last month at highest rate in two years

THE COST of living rose in December at the fastest pace in two years, driven up largely by higher energy prices and other international factors.

Last month’s annual inflation rate of 1.3 per cent on the Consumer Price Index (CPI) was the highest since the end of 2008, with prices now having risen for five consecutive months.

The European Harmonised Index of Consumer Prices measure (HICP), which excludes mortgage interest charges and is preferred by many economists, was still negative on an annual basis in December at -0.2 per cent, but the rate of decline eased from -0.8 per cent a month earlier.

Economists at Ulster Bank said said this trend in the HICP showed that “downward pressure on Irish prices is easing off considerably relative to the height of the recession”.

Annual price growth has been climbing by the Central Statistics Office’s CPI measure since August, but commentators hesitated to herald the return of inflation yesterday, noting that the increases owed much to factors outside the country.

The CSO’s December figures show that the cost of housing, water, electricity, gas and other fuels rose by 9.9 per cent in the year to December, compared to an annual drop of 21.2 per cent a year earlier. Liquid fuel was a key offender, with the cost of home heating oil up by 33.9 per cent during 2010 on the back of higher international oil prices.

In December alone the cost of filling a household tank with oil rose by 11 per cent, while overall prices climbed by just 0.2 per cent.

Higher mortgage interest charges were also a factor in raising the inflation rate last month, having climbed by almost 25 per cent in 2010, while rises in excise duty on diesel and petrol kept transport inflation relatively high at 3.7 per cent.

Food prices rose by 0.1 per cent on an annual basis but individual components of this category marked greater increases. Flour prices were 18.5 per cent higher and cocoa rose by 27.3 per cent.

Dermot O’Leary, chief economist with Goodbody, said the upward trend in food prices was likely to remain in place over coming months, in part because UK food inflation was running at 6 per cent and UK retailers have such a large presence here.

In general, Mr O’Leary noted it was probably too early to to call an end to deflation, with global inflationary pressures mostly low.

Deflation was still evident in a number of sectors last month, with areas most exposed to consumer demand showing noteworthy falls.

Clothing and footwear prices, where discounting took hold before Christmas, were 4.1 per cent lower on an annual basis, while lower spirits prices helped to bring alcohol and tobacco costs down by 3 per cent. Childcare prices fell by 10.7 per cent.

Business group Ibec yesterday predicted that price pressures over the next few years “are likely to remain very subdued”.

The confederation’s chief economist Fergal O’Brien said higher commodity prices would probably see further consumer price increases this year, but added that “extensive spare capacity” in the economy, coupled with ongoing weakness in disposable incomes, would balance against this.