Rising food and oil prices may hit consumer spending

Rising food costs and high oil prices could put pressure on consumers' pockets later this year, economists warned yesterday, as new figures showed a slight fall in inflation last month.

The annual rate of consumer price inflation fell to 4.9 per cent in June, down from 5 per cent in May, according to the Central Statistics Office (CSO).

However, there are fears an international spike in food prices, exacerbated by damage caused to wheat and potato crops by wet weather, will soon hit Irish consumers. If crude oil prices remain at their current high levels it could lead to price rises at petrol pumps.

So far the Republic has escaped most of the high inflation in food prices which have surged by 6 per cent in the UK. However, food prices are now rising by 2.6 per cent year-on-year, which Goodbody stockbrokers said was the highest annual rate of growth since May 2006.

"Given that food price inflation is still much higher in the UK and US, there is a risk of even higher food inflation for the consumer over the coming months," the stockbrokers said.

Bank of Ireland chief economist Dan McLaughlin said it was possible that the abolition of the Groceries Order, which prevented retailers from passing on discounts to consumers, may have given shoppers a temporary reprieve from the global increase in food prices.

Inflation probably peaked at 5.2 per cent last January, said Ulster Bank chief economist Pat McArdle. However, this would be a close call if crude oil prices remained at more than $70 (€51) a barrel.

The cost of oil briefly scaled a new 11-month high above $77 a barrel yesterday, coming within reach of the record high of $78.65 hit last August.

Inflation is likely to dip further next month, but average at a rate of 5 per cent in 2007, Mr McArdle said. Inflation is expected to fall next year when interest rates stop rising.

Although inflation as measured by the Consumer Price Index (CPI) fell last month, another measure used to calculate inflation, the EU Harmonised Index of Consumer Prices (HICP), actually increased in June, climbing to 2.8 per cent.

The HICP excludes mortgage interest and some other consumer items, and is the standard inflation measure across Europe. The average rate in the eurozone is 1.9 per cent.

Reacting to the CSO's figures yesterday, Labour Party spokeswoman on consumer affairs Kathleen Lynch said the 0.1 per cent drop in CPI inflation would be of little comfort to homeowners who have seen their monthly mortgage payments increase by €300 over the past 18 months.

The Irish Business and Employers' Confederation (Ibec) welcomed the lower inflation rate, and said increased productivity was needed to counter a loss in competitiveness.