PRICES FELL by 1.7 per cent in the year to February as interest rate cuts, falling rents and a record decline in clothing and footwear prices deepened Ireland’s rate of deflation, according to the Central Statistics Office (CSO).
Economists predicted yesterday that the cost of living, as measured by the Consumer Price Index (CPI), would continue to fall throughout 2009, resulting in an average deflation rate this year of about 3 per cent.
The February deflation rate follows a 0.1 per cent annual drop in prices in January, which was the first month in which the Irish economy recorded an annual rate of deflation since 1960.
However, much of the deflation rate can be attributed to a series of interest rate cuts by the European Central Bank (ECB) in a bid to keep the European economy afloat, with other sectors of the economy still recording rising prices.
Although food prices fell 0.4 per cent in February, they are rising 0.8 per cent on an annual basis.
Electricity and gas prices, which are scheduled to fall from April, have increased almost 17 per cent and 20 per cent respectively over the past year.
Labour Party social and family affairs spokeswoman Róisín Shortall questioned why prices were continuing to rise in key areas, including a 5.3 per cent increase in GP fees and a 5.8 per cent rise in childcare costs. She said low-income families were suffering a double whammy of costs.
“The increases in GP fees come as tax relief on medical expenses was halved for many people. So patients are paying more in tax and more in fees.
“The increases in childcare come as the Early Childcare Supplement has been cut. So parents are paying more in fees and receiving less in benefit,” she said.
Meanwhile, the cost of home insurance has increased by an annual rate of 16.5 per cent at a time when the cost of building is declining.
“Large-scale price increases in certain sectors, when everyone else is feeling pain, are simply unjustifiable,” Ms Shortall said.
The Irish economy’s descent into deflation increases the likelihood of across-the-board wage cuts, which may in turn push up the real value of household debt and prolong the slump in consumer spending.
Business group Ibec said prices were likely to fall 4-5 per cent on average in 2009, with Ibec economist Fergal O’Brien saying the negative CPI must be part of the debate on wages, prices and costs across the economy.
“It is important that workers faced with nominal wage cuts this year recognise that the substantial drop in prices will help cushion the impact of lower pay,” he said.
However, Irish Congress of Trade Unions (Ictu) economist Paul Sweeney said the falling prices were, in part, due to the weakening of sterling, and that it was far from certain how much this would continue to drag down prices in the months ahead.
“I do think we are probably going to have a negative figure this year, but I don’t think it is going to be as high as 4 per cent,” he said.
Meanwhile, the Harmonised Index of Consumer Prices (HICP) rate of inflation, which excludes mortgage interest, remains in positive territory.
But the annual rise of 0.1 per cent in February was substantially lower than the rate recorded in the previous month and is well below the euro zone average of 1.2 per cent.
As recently as October, the CPI was rising at an annual rate of 4 per cent.
The steep fall in prices since then will provide the Irish economy with “a competitiveness fillip” compared to other EU countries, National Irish Bank economist Ronnie O’Toole said.
However, Fine Gael TD Kieran O’Donnell said price rises in Government-controlled sectors were putting Ireland’s job creation prospects at risk.
