Inflation falls but is still higher than EU average

Inflation fell back unexpectedly last month, despite higher oil prices. The annual inflation rate eased to 2.6 per cent in August from 2.7 per cent in July, with price pressures remaining subdued in many areas.

Prices normally rise relatively sharply in August following the end of the summer sales. However, the 0.6 per cent monthly increase was below the 0.7 per cent recorded last year.

While clothing and footwear prices rose 8.5 per cent as the sales ended, there were smaller increases in most areas. The price of furnishings and household equipment rose 1.1 per cent.

The price of petrol, diesel and home-heating oil all rose due to higher oil prices and are likely to increase again this month. However, the recent easing of crude-oil prices on the international market has lessened fears of a spiral in fuel costs. Oil prices have fallen 14 per cent since last month's record high, when US oil prices had risen close to $50.

The breakdown of the figures over the past year indicate that trends vary across different sectors. Despite the bounce back in prices after the sales, competition seems to be holding down costs in many areas of retailing, with clothing and footwear prices down 3.9 per cent on the year, and furnishings and household equipment down 2 per cent.

Inflation remains higher, however, in the services sector, with education costs up 6 per cent on the year. Restaurant and hotel prices were up 4.5 per cent, leading Ms Kathleen Lynch, the Labour Party's consumer spokesperson, to warn that Ireland is in danger of "pricing itself out" of the tourism market.

Mr Dermot O'Leary, economist at Goodbody stockbrokers, pointed out that accommodation costs in hotels and guesthouses have risen by more than 10 per cent over the past year, which is "clearly having a detrimental effect" on the sector.

The inflation rate here, having dipped below the EU average earlier this year, is now slightly above it. Using the EU-harmonised measure, inflation is now running at 2.5 per cent, compared to the 2.3 per cent EU average,despite economic growth here being well above the EU norm.

Economic analysts expect inflation to edge up from current levels in future months. IIB Bank expects that the rate next year will average 3 per cent.

Analysis from AIB and Friends First suggests that the inflation rate could be close to 3 per cent by the end of the year. Trends in oil prices will be key next year, as will the timing of any interest-rate increases from the European Central Bank, which feed through to inflation through higher housing costs.

The small decline in August was broadly welcomed, with the Irish Congress of Trade Unions saying it would boost real take-home pay. However, in a statement, it reiterated that it expects the Government "to deliver on its commitments by, for example, widening tax bands and removing those on the minimum wage from the tax net. "

ISME, the small business lobby group, welcomed the figures, but warned they may only represent a " temporary respite" with significant increases due in energy,health and postal costs.

The Opposition parties, however, were critical. Mr Richard Bruton, Fine Gael's finance spokesman, said inflation continues above the EU average, even though Ireland is now the most expensive country in Europe for goods and services.