Inflation returns but outlook still negative

DEFLATION TURNED to inflation once again in August, as the summer sales ended and prices rose for the first time in almost a year, according to the latest figures from the Central Statistics Office (CSO).

On an annual basis, however, deflation in the Irish economy remained deep, with prices falling 5.9 per cent over the past 12 months, based on the CSO’s Consumer Price Index (CPI). This matches the annual rate of deflation reached in July.

Higher mortgage interest repayments, in part due to Permanent TSB’s decision to increase its standard variable rate, pushed up the cost of living in Ireland last month. Economists warned yesterday that more banks would increase mortgage interest rates in the months ahead, as they seek to boost their lending margins.

A 3.4 per cent rise in the cost of clothing and footwear last month as the summer sales ended was another reason for the monthly rise in prices. Transport prices increased 1.1 per cent last month, due to higher petrol and diesel prices and a 7 per cent increase in air fares.

The Harmonised Index of Consumer Prices (HICP), the EU-wide measure of inflation that excludes mortgage interest from its calculations, increased 0.2 per cent in August but is down 2.4 per cent on an annual basis.

This compares to a 0.2 per cent annual decline in prices in the euro zone as a whole, showing that deflation in Ireland has been significantly steeper than in the rest of Europe. Economists forecast yesterday that deflation would probably reach a bottom in September, before easing in the final few months of 2009.

This is partly because the 12-month period under comparison in the annual figures will start to exclude the effects of 2008’s spike in oil prices.

“Mortgage costs too are set to continue to push higher, irrespective of what the European Central Bank (ECB) does with official interest rates,” said Alan McQuaid, economist with Bloxham Stockbrokers.

Although the cost of interest on mortgage repayments increased 3.4 per cent in August, they have dropped 48.2 per cent over the past 12 months as the ECB cut its key lending rate to a historic low of 1 per cent. However, despite recent inflationary pressures from the banks, the annual rate of inflation in Ireland looks set to remain negative into 2010. Gas and electricity prices are scheduled to fall in October, while weak levels of household spending are likely to force retailers to once again cut margins.