Irish Consumer Price Inflation in November, as measured by the CPI, decreased by 0.9% in the month. This compares to an increase of 0.6% recorded in November of last year. As a result, the annual rate of inflation fell to 2.5%, down from 4.0% in October 2008, the CSO said today. Goodbody Stockbrokers Chief Economist says Ireland is on path to deflation in 2009 for first time since 1946.
The EU Harmonised Index of Consumer Prices (HICP) decreased by 0.1% in the month, compared to an increase of 0.5% in November of last year. As a result, the annual rate of inflation, as measured by the HICP, decreased from 2.7% in October to 2.1% in November.
The most notable changes in the year were increases in Alcoholic Beverages & Tobacco (+8.8%), Health (+5.9%), Education (+5.7%), Housing, Water, Electricity, Gas & Other Fuels (+4.8%) and Food & Non-Alcoholic Beverages (+4.0%). There were decreases in Clothing & Footwear (-7.2%), Furnishings, Household Equipment & Routine Household Maintenance (-1.9%) and Transport (-0.7%).
The annual rate of inflation for Services was 4.2% in November, while Goods increased by 0.4% in the year.
The most significant monthly price changes were decreases in Housing, Water, Electricity, Gas & Other Fuels (-5.4%) and Transport (-2.2%). There were increases in Alcoholic Beverages & Tobacco (+3.9%) and Clothing & Footwear (+1.3%).
The main factors contributing to the monthly change were as follows:
Housing, Water, Electricity, Gas & Other Fuels fell due to decreases in average mortgage interest repayments, private rents and home heating oil.
Transport fell due to lower petrol&diesel prices and a decrease in airfares while there were increases in car maintenance and taxi fare charges.
Alcoholic Beverages & Tobacco prices rose due to the increase in excise duties on cigarettes and other tobacco products which were announced in the Budget in October.
The CPI excluding tobacco index for November decreased by 1.1% in the month and was up 2.2% in the year. The CPI excluding energy products index was down by 0.6% since October and increased by 2.4% in the year. The CPI excluding mortgage interest fell by 0.2% in the month and was up by 2.1% in the year.
Goodbody Stockbrokers Chief Economist Dermot O'Leary says Ireland is on path to deflation:
Rapid downward trajectory... - Price inflation is now on a rapid downward trajectory that could put the Irish CPI into deflationary territory as early as March of next year. The annual rate of increase in the CPI dropped to 2.5% in November (from 4.0% in October), its slowest pace in three years. The annual rate of increase in the HICP measure fell to 2.1% and is now among the lowest rate in the EU.
...with lower interest rates,...- The largest monthly drop in the CPI on record (since at least 1969) was mainly due to the 5.4% mom price fall in the housing category. Within this category, householders enjoyed a 10% drop in the price of liquid fuels, as well as significant falls in both rental costs and mortgage interest costs, the latter being a reflection of the passing on by the banks of ECB interest rate cuts. The CSO’s latest update on private rental costs reveals a fall of 10% over the past year, with the latest data pointing to a significantly accelerated rate of decline due to the large glut of properties that have entered the rental space over the past twelve months. The housing category of the CPI basket, we believe, will go deeply into negative territory in 2009 as the ECB cuts interest rates down to 1%, even allowing for the fact that these rate reductions may not be passed on in full by the domestic financial institutions.
...energy prices,...- The other main deflationary influence in the CPI basket over the coming twelve months is energy costs. Although we have seen some energy price reductions (e.g. petrol prices are down 6.6% yoy), it is interesting that energy costs are still adding to inflation pressures, being up by 2.5% yoy. There has already been an announcement of a modest electricity price cut, and if energy prices overall continue to fall, this should be able to feed its way through to consumer prices at some stage.
...and domestic demand... - The two factors above are due to external influences, but there is also evidence that the weak domestic demand environment is contributing to falling prices. For example, clothing and footwear prices fell by 7.2% yoy in November, the fastest pace of decline since January 2003, with the unusual incidence of pre-Christmas sales becoming common. It may also be the case that UK retailers operating in Ireland have began to pass on the effect of a lower sterling to Irish consumers (Sterling down 17% relative to the euro in the year to date). We can expect continued falls in High Street prices in the quarters ahead owing to the further recent sterling depreciation and a deteriorating outlook for Irish consumer spending.
...likely to lead to deflation in 2009 - We adjusted our call for Irish inflation in our 2009 Equity Outlook, released yesterday, and now expect the CPI to decline by an average 0.5% yoy next year. Deflation, however, could reach as low as -2% yoy at some stage during the year. This would represent the first full-year annual decline since 1946.
Pat McArdle, Chief Economist, Ulster Bank commented: The November CPI was 2.5%, well below the Reuters consensus forecast of 2.9% and our own 2.7%. Prices fell by 0.9% in the month of November whereas they rose by 0.6% in November 2007, so the swing factor was 1.5% which brought the rate down from 4% in October to 2.5% in November. Prices fell in only four of the twelve CSO categories but were dominated by falls in two large categories, energy and interest rates.
Interest rates were the single biggest influence. Alone, they reduced the CPI by 0.76 percentage points, accounting for more than half of the total fall. This reflects the impact on mortgage rates of the October 2008 half point cut by the ECB. Since then we have had a further two reductions, totalling another 1.25%. There is more to come as all these interest rates have been passed on in full to customers with only very minor exceptions.
The other thing driving the November CPI was energy which accounted for a further 0.4 percentage points of the fall. In November, the price of a litre of petrol was €1.12; since then, it has fallen closer to €1 so there is more to come here too.
The surprise as far as we were concerned was rents. Private rents fell by a massive 7.1% in the three months to Nov (they are only read quarterly) leaving them 10% below November 2007. We had not allowed for such a large fall – this factor accounted for 0.1% of the difference between our figure and the CSO outcome – the rest was a collection of minor items and rounding.
Food prices surprised on the upside, rising by 0.5% in November, the first increase in six months. However, we expect this to reverse in coming months as lower commodity prices feed through.
Our November Quarterly forecast a fall in CPI of 0.5% next year. The outlook has again changed radically in the meantime. The ECB lowered rates by a further 0.5% in November and 0.75% in December, a total of 1.25% in all. This was more than we had expected and the cuts were passed on in full whereas we had assumed that only half would be passed on as banks sought to restore margins. In addition, petrol prices have continued to decline sharply. The impact on next year’s CPI will be considerable. We have revised our 2009 average to a fall of 1.5%. This has obvious implications for the wage agreement and, indeed for the Budget. Social welfare increases of 3% plus now look very generous.
In terms of timing, we are likely to see the CPI turn negative as early as February and it will remain negative until December, bottoming at minus 3% in June. In the short term, our forecast for December, issued early January, has been pulled back to 1.1%. The average for 2008 will be 4.1%, as forecast in our recent Quarterly, with a fighting chance that it will round down to 4%.
The HICP, a better measure of internationally comparable inflation, fell from 2.7% to 2.1%, equal to the Eurozone flash estimate for November. The lesser decline in the HICP reflects the fact that it excludes mortgage rates and hence was primarily affected by energy prices. The 2009 HICP is now forecast to rise by less than 1%.