Prices virtually marked time during the Christmas rush, rising by just one-tenth of 1 per cent. As a result, the annual rate of consumer price inflation eased back to 4.7 per cent in December from 5.0 per cent in November, according to the Consumer Price Index published yesterday by the Central Statistics Office (CSO).
For the year as a whole, consumer price inflation, as measured by the Consumer Price Index (CPI) averaged 4.9 per cent in 2007 compared to 4 per cent in 2006.
This was the highest annual rate in seven years but most economists anticipate that the headline rate of inflation will fall this year. Last December, the Economic and Social Research Institute forecast that inflation would decline from 4.9 per cent in 2007 to 3.3 per cent this year, on the assumption that the ECB does not increase interest rates.
In its last economic forecast, published in October, the Central Bank projected a 3 per cent inflation rate for 2008.
Welcoming the deceleration in inflation during December, David Croughan, chief economist at the employers' group Ibec, said yesterday that slowing international growth should ease inflationary pressures on energy and commodity prices in the months ahead. "Inflation, we believe, will fall to 3.5 per cent by mid-year and below 2 per cent by the end of the year," he said.
Recent experience of rising prices together with expectations of inflation in the future will play a large part in shaping the trade union approach to negotiations on a new pay agreement, which are due to start next month.
Wage growth has been outpacing inflation over the past two years, but not by much. Against an inflation rate of 4 per cent in 2006, the ESRI estimates that non-farm wages increased by 4.7 per cent that year. With the CPI showing an annual increase of 4.9 per cent in 2007, the ESRI projected that wage growth would average 5.5 per cent.
With the public finances slipping into deficit, the Government no longer has the ready cash to deliver substantial tax cuts to those at work. As a result, pay increases are assuming greater importance in determining future trends in material living standards.
The main reason for the near-standstill in the overall price level during December was a 3.4 per cent decline in clothing and footwear prices during the month. Since the CSO's national survey of prices took place on December 11th, this suggests that, fearful of weakening consumer sentiment, many department stores launched their December sales well in advance of Christmas.
However, against a background of broad price stability during December, food prices continued to increase rapidly. Average prices for food and non-alcoholic beverages rose by 0.9 per cent during the month, as higher commodity prices on international markets percolated through to shops and supermarkets.
In the year to December, food and beverage prices in Ireland increased by an average of 6.3 per cent. Irish households spend almost 12 per cent of their total budgets on food and non-alcoholic beverages.