Annual inflation at two-year high

Consumer prices hit a two-year high of 1.3 per cent in the year to December, the highest rate in two years, new data from the Central Statistics Office (CSO) showed today.

This is more than double the 0.6 per cent increase recorded in the year to November. The last time inflation was over 1.3 per cent was in November 2008.

Driving the yearly price hikes in 2010 was a rise in the cost of housing, water, electricity, gas and other fuels of 9.9 per cent. Transport costs increased 3.7 per cent over the year.

Clothing and footwear fell by 4.1 per cent, while prices of alcoholic beverages and tobacco were down by 3 per cent. Education costs also declined, falling 3 per cent.

On a monthly basis, prices were 0.2 per cent higher in December compared to November. This rise was mainly fuelled by higher petrol and diesel prices due to an increase in excise duty in the December budget, higher insurance premiums and a rise in the cost of home heating oil.

But analysts said it was premature to say the deflationary period was over.

"The rise in energy and food prices internationally may prove to just have a transitory effect on inflation, but this, of course, is beyond Ireland's control. Outside of these, global inflation pressures are low," said Goodbody economist Dermot O'Leary.

"Therefore, we think it would be premature to call the deflationary period to regain competiveness in the economy over, whether it be reflected in domestic wages or the general level of consumer prices."

The EU Harmonised Index of Consumer Prices (HICP), which excludes items mortgage interest and motor insurance, increased by 0.2 per cent in the month and fell 0.2 per cent month on month.

Ireland is the only country within the 27 European Union member states to remain in negative territory on the HICP.

Earlier this month,  ECB president Jean-Claude Trichet warned on a rise in inflation in across the euro zone and hinted at an increase in interest rates this autumn.

Davy analyst Conall MacCoille warned of complacency. "Central banks are pump-priming at the most aggressive pace in decades, governments are hiking sales taxes, food and energy costs are surging, and yet there seems an air of complacency about inflation risks," he said.

"Clearly there's a powerful argument to be made that recession has left too much spare capacity in the labour markets, housing, factories and office space of the big western economies to allow price bottlenecks to drive consumer price inflation higher. But for all the debt-hobbled economic weakness in parts of the United States, Europe and Japan, world growth at large is still well above trend rates in excess of 4 per cent and global monetary policy is switched to ultra loose."