Rate of deflation slows to lowest level since January 2009

THE PACE of deflation continued to decline in May, but eased to the slowest in over a year.

Prices were an average of 1.1 per cent lower in the year to May, the Central Statistics Office (CSO) said, led by falling prices in clothing and footwear and cheaper food.

The rate of slowdown in the price falls came as a surprise to analysts, who noted it was the slowest rate of decline since January 2009. Deflation peaked at 6.6 per cent in October 2009 and has slowed steadily since then.

On a monthly basis, prices showed a rise of 0.6 per cent compared with April, up from last month’s increase of 0.2 per cent.

The latest figures follow annual decreases of 2.1 per cent recorded in April, 3.1 per cent in March and 3.2 per cent in February.

The biggest falls were seen in clothing and footwear, which declined 12.6 per cent over the year, and food and non-alcoholic beverages, which were 6.3 per cent cheaper than last year.

The cost of household equipment and routine household maintenance fell 4.6 per cent.

However, the cost of education continued to rise, gaining 9.1 per cent over the year, while transport prices were 4.9 per cent dearer, and housing, water, electricity, gas and other fuels added 3.7 per cent.

The annual rate of inflation for services was 0.5 per cent, while goods decreased by 2.8 per cent.

On a monthly basis, overall prices have steadily increased since February, when the consumer price index rose 0.1 per cent compared to January.

The latest monthly rise was partly fuelled by a rise in the cost of mortgage interest repayments and home heating fuel. Meanwhile, rising costs for petrol and diesel pushed up transport costs.

Prices across Europe, measured by the EU harmonised index of consumer prices, rose 0.3 per cent in the month but were down 1.9 per cent compared with May 2009. The index does not include mortgage interest costs.

Analyst said they expected further fall-off in the rate of deflation. Bloxham economist Alan McQuaid said prices were expected to fall by an average of 1.1 per cent for the year.

“The bottom line is that overall prices in Ireland are likely to be lower on average again in 2010. However, the rate of deflation is set to ease considerably this year,” Mr McQuaid said.

“Following an average drop in prices of 4.5 per cent in 2009, we are looking for a much more modest annual average fall in 2010 of around 1.1 per cent.”

Business lobby group Ibec said inflationary pressures in the domestic economy remain muted. The group said it expected headline inflation to return to positive territory in the second half of this year, but price levels would remain below the 2008 peak for a number of years.

However, small business association Isme said it was concerned that the figure masked rising business costs, which would undermine competitiveness and jobs.

Chief executive Mark Fielding called for cost competitiveness to be top of the Government agenda, warning that the Irish small and medium enterprise sector would struggle to gain market-share when the recession faded.