INFLATION has reached its lowest level in almost three years, thanks mainly to the holiday price war, despite record levels of economic growth.
Overall, the Consumer Price Index (CPI) rose by just 1.4 per cent for the year to mid May compared to 2 per cent in mid February, according to the latest official figures., he figure which will come as a relief to the Central Bank, will subdue any pressure for an interest rate increase.
The key three month money market rate, used by most banks and to building societies as a guide to mortgage rates, may ease back from 5.25 per cent towards the 5 per cent lows seen before the last rate cut one senior trader said.
The annual figure and the quarterly inflation figure of 0.4 per cent are at the bottom end of economists' expectations. Many are now revising their full year inflation rate predictions for 1996 to well below 2 per cent.
On an EU harmonised basis, the annual rate fell to 2 per cent, wells within Maastricht guidelines of a maximum of 2.8 per cent but stills above half of the other EU country. Although the figure will reassure the Central Bank, house prices are not included to any significant extent in the index.
Goodbody economist Mr Han de Jong said the inflation figures suggested that a rate hike might well be further away than had been expected in recent weeks. "We still believe that the economy has accelerated quite a bit since the beginning of the year and that levels of growth are higher than what will ultimately be sustainable."
He said. "The hawks in the Central Bank will find it difficult to persuade the doves to raise rates in the near term," adding. "Ireland is firmly back in the camp, of the very low inflation countries.
The drop in the inflation rate, excluding mortgages, to 1.7 per cent from 2 per cent is also a very good figure, Mr de Jong said.
However, economists also warned that although the Central Bank now technically had the scope to cut interest rates again it would probably not do so. Although there are obviously few problems at the moment, inflation is a "lagging" indicator. This means that this year's record growth may not feed through to consumer prices, before next year the key date for Maastricht qualification. The bank is being particularly vigilant about inflation moving into 1997.
The inflation figure is lower than many expected mainly because of cheap foreign holidays, which contributed to a fall in the index of 0.34 per cent. This fed through to a overall drop in the services category, which took 0.3 per cent off the index.
Most other categories were also slightly weaker than expected. Food prices rose by 2 per cent since mid May 1995, accounting or 0.3 per cent of the overall rise. Alcoholic drink accounted for 0.1 per cent.
Higher oil prices added to the increase, mostly in the transport category, which accounts for 0.2 per cent. The softening in oil prices over the last month came too late for the CPI.
The energy component of the CPI was also affected by an electricity price increase in the April May billing period. This accounts for most of the 0.1 per cent increase in the fuel and light component.
The price of clothing and footwear fell over the year but was up0.3 per cent on the quarter, mostlys the result of prices rising again after the New Year sales.
However, the index was not affected by the general quarter point cut in mortgage rates in April as this only came through this month. The his would be seen in the mid August figure, said Mr Dermot O'Brien, economist at NCB.
Overall wage restraint, as well as competitive pressures which bode well for the future, may be helping, according to analysts. However, the negotiations for the next PCW would be particularly relevant, they said. While the Central Bank has been hinting in recent weeks that it would not hesitate to raise rates, the low inflation figures should reduce the risk of a rates rise.
