The summer sales have been diagnosed as the main reason for the fall in the inflation rate, writes Laura Slattery

WHAT GOES up must come down, they say - or at least as far as Irish prices go, they hope.

The good news yesterday was that the Republic's inflation rate fell from its now familiar rate of 5 per cent to 4.4 per cent in July.

But good news about the economy can be interpreted as bad news without too much effort, and commentators were quick to point out that it was the traditional summer sales that were the main reason for the 0.3 per cent drop in prices last month.

The impact of the European Central Bank's last interest rate hike has yet to be felt by mortgage holders, while the 17.5 per cent electricity price hike planned for August and two 20 per cent gas price increases scheduled for September and January will also diminish consumers' ability to spend cash at rates that would stop the Government's tax receipts from slipping further.

Retailers' discounts on clothes and footwear led to a 10.9 per cent reduction in prices, although whether consumers snapped up these bargains in significant piles will not be officially known until the Central Statistics Office (CSO) publishes its retail sales index for July in September.

Clothes and shoes have become a reliable deflator in the consumer price index basket and now cost 5.8 per cent less than they did a year ago. Elsewhere, the introduction of new road tax rates for cars in July meant the price of cars fell 1.5 per cent last month.

But while it may have been cheaper to buy a car, the cost of petrol rose 1.9 per cent in July and is up 13.7 per cent on an annual basis. Diesel customers are paying 32 per cent more for fuel than they were a year ago. Oil prices have eased back from record highs of $150 a barrel in recent weeks, which should result in some relief at the petrol pumps next month, according to Davy Research economist Rossa White.

But fuel prices and the global economic downturn continue to have a drastic effect on the airline industry, which put up its fares 11 per cent in July, while the tourism drought meant hotels and other accommodation providers were forced to take the unusual step of cutting their prices 0.3 per cent in the middle of their peak season.

Food prices fell for the second month in a row, dropping 0.4 per cent in July. The annual rate of food inflation is now 6.8 per cent, down from 9.6 per cent in March, with greater price sensitivity among consumers forcing supermarkets to bring down prices.

After letting the last round of wage talks collapse, the Government will now hope oil and food prices will continue to fall, and take the sting out of union negotiators' push for wage increases that mean something in real terms.

"But, it would be foolish to assume that just because prices have fallen sharply in recent weeks that we have definitely seen the peak in oil and food prices in this current cycle," Alan McQuaid, economist at Bloxham Stockbrokers said yesterday. "Quite simply, we just don't know."