The annual rate of inflation fell to 1.8 per cent last month, its lowest level in more than four years, as the January sales drove down the prices of a range of goods, writes Cliff Taylor, Economics Editor.
Inflation is expected to continue to fall over the coming months and analysts expect the annual rate to drop below 1.5 per cent during the spring, with some believing it could fall as low as 1 per cent.
The January figures from the Central Statistics Office (CSO) suggest heavy discounting during the post-Christmas sales. Overall prices in January fell by 0.5 per cent compared to the previous month. This reduced the annual inflation rate to 1.8 per cent, from 1.9 per cent in December. The main contributor to this monthly decline was a sharp 14.8 per cent drop in clothing and footwear prices - traditional sales items.
A breakdown of the CSO data shows that the price decline in this sector was similar to that which has taken place in the sales in previous years, while prices also fell for a range of other furnishings and electrical products.
However, inflation remains more entrenched in the services sector, particularly in areas affected by Government or State companies, with a rise in health costs due to higher hospital charges and an increase in the threshold for the drug payment scheme, higher rail and bus fares and an increase in motor tax.
The annual inflation rate has dropped sharply in recent months, reflecting the impact of the rising euro - which reduces import prices - and price competition in some areas of the economy. This is particularly evident in clothing and footwear, where prices are 4 per cent lower than last year, indicating that, while the price cuts in the sales may have been similar to previous year, the overall trend is downwards due to intense international competition. Lower mortgage interest rates have also contributed over the past year, as have restrained consumer demand in some areas.
The peak in the inflation rate last year was 5.1 per cent in February. The decline since then has been rapid and from a position where the Irish rate was more than twice the EU average, the gap has now nearly closed. The CSO figures show that the harmonised index of consumer prices - the EU inflation measure - was 2.3 per cent in January, just above the 2 per cent EU average.
However, recent research has shown that the high inflation rate of recent years means that the actual level of prices here is one of the highest in the EU. If the Republic is to fall down the price league, inflation here will have to move below the EU average for a sustained period.
The annual rate should fall below 1.5 per cent in March, according to Mr Jim Power of Friends First. He points out that the main source of inflation is now the public sector, as the increased financial burden of rising public pay necessitates higher charges.
AIB Economic Research, meanwhile, predicts that the annual rate could drop to 1.6 per cent next month and average 1.9 per cent for the year.
IBEC economist Mr David Croghan welcomed the fall but warned that "continuing high levels of inflation in some service sectors such as health, education, utilities and local charges, as well as private services such as catering, recreational activities,hairdressing and childcare, needed to come down sharply."
Ms Kathleen Lynch, the Labour spokesperson on consumer affairs, said that the figures "do not appear to reflect the reality being experienced by consumers doing their weekly shopping who are faced with a consistent rise in the price of a range of goods."
The scepticism of consumers will be increased by the disclosure that the price of the pint is likely to go up by six cents, she said in a statement.
Fine Gael's Mr Richard Bruton said that the cost of a "typical" Valentine's night out has risen by 44 per cent - or €100 - in five years to more than €300. This is due to the rising costs in restaurants, pubs, cinemas and hairdressers.
