Deflation slows in January

Consumer prices fell by 3.9 per cent in the year to January, its lowest annualised rate in 10 months, according to new data released by the Central Statistics Office (CSO) today.

The latest figures show a continued easing in the rate of deflation, which peaked at -6.6 per cent in October, before easing to -5.7 per cent in November and -5 per cent last month.

Prices for services fell 4.4 per cent in the year to January, while the cost of goods declined 3.4 per cent.

The most significant change in the year to January was seen in housing, water, electricity, gas and other fuels, which declined 15.2 per cent. Prices for clothing and footwear fell 10.8 per cent over the year, while food and non-alcoholic beverages saw costs fall 8.2 per cent. There was a 4.6 per cent decrease in prices of furnishings, household equipment and routine household maintenance.

However, the cost of education rose 11.3 per cent, while transport and health rose 3.5 per cent and 1.9 per cent respectively.

Goodbody analyst Deirdre Ryan said the slowing rate of deflation could be a reflection of the fact that mortgage interest costs are no longer having as much influence on the index.

"In fact, while the overall rate of deflation is beginning to slow, core deflation, which excludes energy and mortgage interest costs, is on an accelerating trend. Core deflation stood at -2.8 per cent year on year in January, its fastest rate yet," she wrote in a note.

Winter sales saw prices for clothing and footwear and furniture, home furnishings and household maintenance fall during January compared to December.

Although the cost of a typical basket of consumer goods and services continued to fall month on month, the 0.6 per cent rate of decline moderated compared to the same month in 2009, when prices fell 1.7 per cent.

In the month, prices for clothing and footwear fell 9.2 per cent, driven by traditional winter sales as retailers tried to entice shoppers to spend.

Changes introduced in the budget had an impact on the month's figures. The effect of the changes in PRSI relief for dental and optical costs contributed to a 2.2 per cent increase in prices for health services.

A rise in petrol and diesel prices was partially offset by a decrease in airfares, leading to a rise of 0.6 per cent in transport costs.

The EU Harmonised Index of Consumer Prices (HICP) fell by 0.7 per cent in the month compared to a decrease of 0.8 in January of last year. Prices on average were 2.4 per cent lower in January compared with the same month in 2009.

Bloxham economist Alan McQuaid predicted the moderation in the rate of deflation would continue throughout the year.

"The bottom line is that while overall prices are likely to be lower on average again in 2010 than in 2009, Ireland's rate of deflation is set to ease considerably this year. Following an average fall in prices of 4.5 per cent in 2009, we are looking for a much more modest fall of less than 1 per cent in 2010," he said.

Chief economist with National Irish Bank Dr Ronnie O'Toole the fall in Irish prices should boost the competitiveness of the country's exporters, particularly in the UK where food prices have risen by 12 per cent over the past two years.

"This will help offset much of the negative effect of the value of sterling which, at 88p, remains highly disadvantageous to Irish exporters. Food products represent around half of the exports of indigenous Irish firms," he said.

Meanwhile, the Irish Small and Medium Enterprises Association (Isme) called on the Government to address the country's "out of kilter" competitiveness including State-influenced costs, such as commercial rates, water, waste charges and energy costs.

"We are not and have not been competitive in a very long time, and recognising this, small businesses have cut their controllable costs to the bone, as evidenced by the reduction in consumer prices of goods and services of 3.4 per cent and 4.4 per cent respectively. In stark contrast, State influenced costs have continued their inexorable rise, undermining the cost cutting efforts of the private sector," said Isme chief executive Mark Fielding.

"In other words, the current level of negative inflation should not be used as an indication that all costs are being kept under control, unfortunately this simple point is lost on the powers that be. The overall prize of reducing state influenced costs is improved competitiveness, company survival and job retention."