Cheaper fuel and food sees inflation ease to 4.3%

Cheaper fuel and a third monthly drop in food prices saw the cost of living ease slightly in August as the annual rate of inflation fell to 4.3 per cent, down from 4.4 per cent in July.

According to data from the Central Statistics Office (CSO), increases in mortgage, electricity and clothing costs were more than offset by falls in fuels, rents and food bills.

Economists said food prices have now fallen for three consecutive months as a combination of lower commodity prices and a competitive war among multiples push prices down.

Pat McArdle, chief economist at Ulster Bank, said food prices fell by a greater amount last month “than any other August since 1998 and by more than in any other month since October 2005”.

Food prices were 0.4 per cent lower in August than July although they remain 6.4 per cent higher than one year ago. Prices for eggs, flour, tea, better and meat products all fell last month while cereals, fruit juice and cooking oils increased.

Fergal O'Brien, economist at business group Ibec said the second monthly fall in inflation was a long-awaited “silver lining” for the Irish economy.

“In a month which saw electricity prices increase by 17.5 per cent and the impact of the most recent ECB interest rate increase passed on to households, it is a welcome relief for consumers to see that a number of other prices fell," he said.

While the annual rate of inflation fell, consumer prices rose 0.5 per cent last month with the bulk of the increase accounted for by the increase in mortgage rates and electricity costs.

This monthly increase was the same as in August 2007.

Mortgage interest costs rose 4.7 per cent on the month and to 17.6 per cent in the year after the European Central Bank increased interest rates in July.

Other significant price increases last month were a 5.8 per cent increase in clothing and footwear as the summer sales came to an end. Despite last month’s rise clothing and footwear prices remain over 5 per cent lower than in August 2007.

Restaurant and hotel prices fell for the first August since 1997, dropping 0.2 per cent while hotel accommodation dropped 2.1 per cent.

The cost of renting also deceased last month, falling 2.9 per cent. Over the last 12 months, private rents have increased by just 2 per cent, according to the CSO.

With employers, trade unions and Government officials due to start discussing the pay element of talks on a new social partnership deal today, Mr McArdle said the easing of inflation “finally nails union claims that inflation this year would be close to 5 per cent”.

Based on today’s data Mr McArdle said he now expects annual inflation this year to average at 4.4 per cent before falling to 2.5 per cent for 2009.

Following the more than 30 per cent drop in crude oil prices since July transport costs showed a sharp fall last month. Airfares dropped 5.8 per cent, petrol prices eased 4.4 per cent to an average of 128.8 cent a litre and diesel prices dropped 4.4 per cent to 138 cent a litre.

Despite these price falls, petrol prices remain 10.5 per cent higher than a year ago, while diesel prices are 25.5 up.

Fine Gael finance spokesman Richard Bruton said despite easing in recent months "Irish prices have increased 50 per cent faster than EU colleagues since 2000”.

Inflation in areas administered by Government such as health, education, communications and household services had all accelerated last month, he said.

Healthcare costs rose 0.8 per cent in August to an annual rate of 6.3 per cent and close to a three-year high, according to the CSO. Education costs increased 0.2 per cent in August and by 6.5 per cent over the last year.

Referring to rises in fuels, education, and healthcare, Labour spokesman on consumer rights, Senator Brendan Ryan, said the CPI figures make for "grim reading" for households "already struggling to meet the costs of the most basic goods and services".

"Over the last year gas and other fuels has risen by 11.5 per cent, education by 6.5 per cent, food and non-alcoholic beverages by 6.4 per cent and health by 6.3 per cent," he said.

Using the European measure of consumer price inflation the HICP, which does not include mortgage costs, Ireland’s annual inflation rate was 3.2 per cent in August, well below the eurozone average of 3.8 per cent.

Deirdre Ryan, economist with Goodbody Stockbrokers said inflation would have fallen further last month were it not for the hike in electricity prices.

Based on today's figures Davy said it now expects the rate of inflation to halve next year to 2 per cent, down from an average of 4.5 per cent this year.

She said the substantial drop in global energy prices recently may remove the need for a further electricity price rise early next year.

Mark Fielding, chief executive of the Irish Small and Medium Enterprises Association said rising costs continued to impact severely on small businesses.

“The cost environment, in particular energy, transport, local charges and labour costs, are still having a devastating impact on Irish competitiveness,”

“Consequently, businesses are anticipating a dramatic increase in redundancies over the next number of months”, he said.