|Source: CSO |
Irish Consumer Price Inflation in July, as measured by the CPI, decreased by 0.3% in the month according to the CSO. This compares to an increase of 0.3% in July of last year. As a result, the annual rate of inflation fell to 4.4%, down from 5.0% in June 2008. Clothing and footwear prices fell by almost 11%.
The EU Harmonised Index of Consumer Prices (HICP) decreased by 0.5% in the month, compared to a decrease of 0.2% in July 2007. The annual rate of inflation, as measured by the HICP, decreased from 3.9% in June to 3.6% in July.
The most notable changes in the year were increases in Housing, Water, Electricity, Gas &Other Fuels (+9.7%), Food &Non-Alcoholic Beverages (+6.8%), Education (+6.4%) and Health (+6.2%). There were decreases in Clothing & Footwear (-5.8%) and Furnishings, Household Equipment&Routine Household Maintenance (-1.5%).
The annual rate of inflation for Services was 4.5% in July, while Goods increased by 4.2% in the year.
The most significant monthly price changes were decreases in Clothing & Footwear (-10.9%), Furnishings, Household Equipment &Routine Household Maintenance (-1.4%) and Food & Non-Alcoholic Beverages (-0.4%). There were increases in Housing, Water, Electricity, Gas &Other Fuels (+1.3%) and Transport (+0.5%).
The main factors contributing to the monthly change were as follows:
Clothing & Footwear and Furnishings, Household Equipment & Routine Household Maintenance fell due to the traditional summer sales.
Food & Non-Alcoholic Beverages fell due to price decreases across a range of products including breakfast cereals, fresh fruit and vegetables.
Housing, Water, Electricity, Gas & Other Fuels increased due to higher average mortgage interest repayments and increases in the cost of home heating oil and coal.
Transport rose due to increases in airfares and higher petrol and diesel prices, which were partially offset by a decrease in the price of new and second-hand cars.
The CPI excluding tobacco index for July decreased by 0.3% in the month and was up 4.3% in the year. The CPI excluding energy products index was down by 0.5% since June and increased by 3.5% in the year. The CPI excluding mortgage interest decreased by 0.5% in the month and rose by 3.6% in the year.
Rossa White economist at Davy said today that inflation will rise in the short term but will fall sharply from January 2009 onwards:
CPI inflation back down to 4.4% from 5%
CPI annual inflation moderated to 4.4% in July from 5% in June. The HICP rose 3.6% year-on-year, the slowest rate of inflation since April.
Inflation will rise in the short term and remain above 4.5% due to administered price increases in electricity (17.5% in August) and gas (20% in September).
Commodity price falls will help cancel out most of the imminent increase in electricity and gas prices
At least those price hikes will be cushioned by the recent drop in fuel prices. Note that this CPI survey was conducted on July 8th. Since then, petrol prices have dropped 11% on global markets. That could potentially lower the CPI by 0.3-0.4% – cancelling out much of the damage done by electricity and gas.
Note too that food prices have dropped for two straight months and will fall further. For example, the end-year price of corn has plummeted by 33% from its high at the end of June.
Inflation to drop to 2% in 2009
Inflation will decline sharply from January 2009 due mainly to below-trend growth in the economy. Plenty of spare capacity will open up, making it harder for domestic businesses to raise prices.
In addition, two ECB rate cuts in H1 2009 may bring down mortgage costs (we are assuming that banks will not pass on the full benefit though).
If commodity prices keep falling, inflation will decelerate even more rapidly (we plug in the futures curve for commodity prices).
It is crucial that the government avoids any further administrative price hikes. In that context, it is still incredible to see that health inflation is still as high as 6.2% and education is even higher at 6.4%.
At least the collapse of the pay talks is welcome news. There is no basis whatsoever for wage increases in the face of the rapid deterioration in the labour market, where the unemployment rate will soon be above 6%. It is time to let the public sector deal directly with the government on pay and employment levels (none of the job losses so far are in that sector) and leave the private sector to respond to market forces. Bargaining power for unions in the middle of a recession is pretty minimal.
CPI inflation may drop to 2% on average in 2009, while the HICP may also record inflation of 2%. By the final three months of 2009, annual CPI inflation is likely to be below 1.5%.
Falling commodity prices set to drive inflation lower - IBEC
Commenting on the latest inflation figures from the CSO, IBEC Senior Economist Fergal O’Brien said: "Falling food prices and somewhat larger reductions than normal in the summer sales are the main reasons behind the significant reduction in inflation. Food prices fell by 0.1% June and have fallen by a further 0.4% in July as lower global food commodity prices begin to have an impact in the supermarkets.
"The price of commodities on world markets fell by more in July than in any month since 1980. With the price of oil already 20% off its peak it is likely that inflation will moderate considerably as we move into 2009. The benefit of falling oil prices has been evident in August in the form of lower prices at the fuel pumps.
"The July inflation figure was helped by the fact that the impact of the recent interest rate increase from the ECB was not as large as expected. In addition, the introduction of the new VRT arrangements for cars in July resulted in price falls of 1.5% in the month and this helped offset much of impact from increased fuel costs. The harmonised index of consumer prices was 3.6% in July, well below the eurozone inflation rate of 4.1%.
"The external factors of high food and energy prices have been the main drivers of Irish inflation over the past year. The annual cost of energy imports per household has doubled from €1,700 in 2004 to €3,400 in 2007, with further increases coming through in 2008. This revenue has now left our shores and to attempt to compensate ourselves for this loss through inflation-linked wage increases is unrealistic and would have long-term damaging consequences for our economy," O’Brien concluded.
Pat McArdle, Chief Economist at Ulster Bank commented today: "The July CPI outcome was 4.4%, down from 5% in June, well below the Reuters consensus forecast of 4.8% (6 forecasters) and also below the UB 4.7% forecast.
Prices fell by 0.3% in the month of July, whereas they rose by 0.3% a year ago, a swing of 0.6%, which lowered the annual rate from 5% to 4.4%. The big factor in the turnaround was mortgage interest. This July, a few banks raised their mortgage rates reflecting higher funding pressures from the credit crunch and, perhaps, in anticipation of the hike in ECB rates which was widely expected. (However, the main impact from the recent ECB hike will not be seen until next month when the August CPI is released). A year earlier, there was a much bigger increase in mortgage rates as the last of the 2007 ECB rate hikes was passed on. The difference between the two was sufficient to lower the CPI rate by 0.25%. However, this was expected and should have been factored into most forecasts.
The surprise factor in this month’s figures was the softening in price pressures in a number of other areas. Food prices fell for the second successive month in July. You have to go back to July 2004 to find the last time food prices fell in July. Moreover, the falls were widespread, covering Groceries Order (GO) and non-GO items. Annual food price inflation peaked at 9.6% in March – it is now down to 7.1%. By comparison with the euro area, our food prices rose very strongly in the first quarter but fell behind in the second. Our July prices are likely to be softer than the rest. It now looks like we have passed the peak and, indeed, that the competition on prices in grocery stores, which is becoming more obvious on a daily basis , is beginning to have an impact. If so, then we can expect further falls in coming months. Overall, the softer food prices accounted for about 0.1% of the lower than expected CPI.
While petrol prices behaved as expected – there was a 1.9% increase to €1.34 a litre in July, the price of cars fell by 1.5%. The latter knocked a further 0.1% off the CPI – we should have anticipated this but forgot to allow for it.
The final 0.1% surprise reduction came from Restaurants and Hotels. The price of accommodation fell by 0.3% in July. This was the first fall in July in the 11-year history of the monthly CPI series. Restaurant prices were also soft, rising by 0.2% versus an average July rise of 0.5% over the past five years. Again, it appears that the softer economy, not to mention the poor tourist season, is having an impact.
The Summer sales effect was only slightly stronger than usual – clothing and footwear prices fell by 10.9% - the average of the previous five Julys was 9.8% - and so did not have a major impact on the broad picture.
We are still set to go back to 5% in August but the spreading of the gas and electricity price hikes means that the feared spike above 5% is now unlikely. The CPI should stay around 5% for a few months before falling back. The softening in inflation in today’s numbers is good news for the Government. They were right to let the wage talks collapse. The inflation picture is beginning to improve. It now looks like the average for 2005 will be around 4.7% and, barring more ECB hikes which are increasingly unlikely, next year’s average could be below 3.5%.
The HICP, which is a better measure of internationally comparable inflation, fell to 3.6% in July, well below the Eurozone flash estimate for of 4.1%, further confirmation of the new trend in Ireland."