ECB put off rate rise, but cost of food and clothing have jumped, writes Paul Tansey, Economics Editor

The dip in the headline rate of consumer price inflation during September is somewhat fortuitous on two counts.

In the first place, the deceleration in the annual headline inflation rate during September reflects, in part, the decision of the European Central Bank (ECB) at the start of the month not to proceed with its intended increase in euro-zone interest rates.

The ECB decided to defer any increase in the cost of money because of the credit crisis in international financial markets.

Increases in ECB interest rates are translated swiftly into higher mortgage interest rates for Irish home buyers. Over the past year, mortgage interest costs in Ireland have risen by 34.8 per cent, reflecting the increase in the ECB's key interest rate from 3 per cent to 4 per cent. Higher household bills for mortgage interest have been responsible for almost one-half of the 4.6 per cent rise in the general level of Irish prices over the past 12 months.

In the second place, the measured increase in the price of food and non-alcoholic drinks during September was only one-fifth of a percentage point.

This reflects the fact that the survey of prices in the shops undertaken each month by the Central Statistics Office was conducted on September 11th, while most shops and supermarkets raised the prices of many food products towards the end of the month.

The rise in retail food prices mirrors steep increases in primary commodity prices on global markets in recent months.

Clothing and footwear was the biggest contributor to inflation during September. The ending of the summer sales saw average retail prices for clothing and footwear rise by 4.7 per cent during the course of the month.

Higher medical insurance and house insurance costs also pushed average consumer prices higher during September.

These increases were partially offset by a near -1 per cent decrease in average transport prices, reflecting lower petrol prices and reduced air fares.

However, when mortgage interest is stripped out of the inflation equation, the underlying rate of price increases facing consumers in Ireland accelerated during September.

The underlying annual rate of harmonised index of consumer prices (HICP) inflation increased from 2.3 per cent in August to 2.9 per cent in September. Moreover, the inflation gap between Ireland and other euro-zone economies continues to widen.

Ireland's underlying inflation rate of 2.9 per cent in the year to September compares with a Eurostat "flash" estimate of 2.1 per cent for euro-zone inflation rate over the same period.

The gap was narrower in August, with Ireland's 2.3 per cent HICP inflation rate comparing against a 1.7 per cent HICP inflation rate for the euro zone.

The continuing divergence in Irish and euro-zone inflation rates - evident since 2005 - combined with the recent weakness of sterling and the US dollar against the euro is making it progressively more difficult for Irish-based enterprises to compete successfully on international markets.