 |
| Source: CSO |
Irish Consumer Prices in May, as measured by the CPI, fell 0.5% in the month. This compares to an increase of 0.8% recorded in May of last year. As a result, price inflation, as measured by the CPI, was 4.7% lower in May compared with May 2008. It was the biggest plunge since 1933.
The price of oil had peaked in New York at $147 a barrel last July and the decline in energy prices until recently are still impacting the downward trend. Coupled with the plunge in interest rates, the Irish economy is experiencing the first period of deflation since the 1940's. While interest rates will remain low for some time, energy cost rises will begin impacting the index soon. In the US gasoline prices have risen by 18% in the past month.
The EU Harmonised Index of Consumer Prices (HICP) decreased by 0.4% in the month, compared to an increase of 0.6% in May of last year. As a result, prices on average, as measured by the HICP, were 1.7% lower in May compared with May 2008.
The most notable changes in the year were decreases in Housing, Water, Electricity, Gas & Other Fuels (-23.6%), Clothing & Footwear (-10.8%) and Transport (-5.5%). There were increases in Miscellaneous Goods & Services (+8.6%), Alcoholic Beverages & Tobacco (+7.9%), Education (+4.5%) and Health (+3.5%).
Services prices fell by 4.8% in the year to May, while Goods fell by 4.5%.
The most significant monthly price changes were decreases in Housing, Water, Electricity, Gas&Other Fuels (-4.0%) and Health (-0.6%). There were increases in Clothing&Footwear (+0.8%), Transport (+0.4%) and Alcoholic Beverages & Tobacco (+0.4%).
The main factors contributing to the monthly change were as follows:
Housing, Water, Electricity, Gas & Other Fuels fell due to further decreases in average mortgage interest repayments and private rents and a reduction in electricity and gas costs.
Clothing & Footwear prices increased due to a recovery in prices following sales.
Transport rose due to increases in petrol & diesel prices.
Alcoholic Beverages & Tobacco rose due to price increases for cigarettes and spirits.
The CPI excluding tobacco index for May fell by 0.6% in the month and was down 5.2% in the year. The CPI excluding energy products index fell by 0.4% in the month and decreased by 4.1% in the year. The CPI excluding mortgage interest fell by 0.4% in the month and was down by 1.2% in the year.
Deirdre Ryan, economist at Goodbody Stockbrokers commented:
Deflation continues at pace in May...- The rapid decline in Irish price levels continued at pace in the month of May. Prices fell a further 0.5% mom taking the annual decline in the CPI deeper into negative territory, with deflation of 4.7% recorded in the year to May (-3.5% yoy in April). Such a pace of price decline continues to outstrip that seen on a Europe wide basis, where the HICP reveals prices have remained flat across the euroarea as a whole over the past year. On the HICP measure deflation in Ireland was -1.7% yoy in May.
...with significant utility price reductions coming into effect - While we have seen the downward charge in the price level led by rapidly falling mortgage interest costs, this was not the case in May when significant utility price changes were the main deflationary influence. The implementation of price cuts for both gas and electricity saw the costs of these items fall 11% and 10% respectively in May. Given that utility costs for both households and businesses are at the upper end of the scale on a Europe wide comparison, these reductions are very much welcomed. However, with an adjustment in Ireland’s cost base needed if Ireland is to participate fully in any international recovery, scope for further reductions in energy costs relative to Europe still exists. Overall the housing category continues to witness the most dramatic fall in costs over the past year, with the annual rate of deflation for this category running at -24% yoy in May.
Moderating price levels becoming more widespread... - The latest data also contains evidence that the moderation in prices is slowly becoming more widespread across the economy. Excluding mortgage interest, the CPI fell 1.2% yoy in May, an acceleration on the -0.3% rate of decline seen in April, while the index excluding mortgage interest and energy is now in deflationary territory also (-0.5% yoy). Furthermore, while declining mortgage interest costs have contributed to three quarters of the overall annual fall in the CPI, in the month of May this proportion was less than half, indicating adjustments in the economy wide price level are gaining traction more recently.
...especially in the services sectors - This is especially true of the services sectors of the economy. For instance, inflation in the restaurant and hotel sector was flat on an annual basis in May compared to the 3.4% yoy rate that was seen at this stage last year. A similar picture is evident in the recreation and culture component of the CPI basket, where prices fell moderately in the year to May (-0.2%), compared to an annual increase of close to 2% that prevailed lin May of last year. Services deflation overall was -4.8% yoy in May, similar to the 4.5% decline in the cost of the goods basket seen over the past year.
More to go the cost adjustment - Nominal wage cuts have become commonplace across the Irish economy with an average reduction of 7-8% seen thus far. While this is a painful adjustment undoubtedly, the extensive declines being experienced in the CPI basket as seen above mitigates this somewhat and indicates that progress continues to be made on a number of fronts in relation to restoring Ireland’s competitiveness.
Rossa White, chief economist at Davy commented: Domestically-generated prices rising at slowest rate for 11 years
CPI falls 0.5% month on month; HICP down 0.4%
-
The Irish price level dropped sharply again in May: unlike in previous months mortgages did not account for the majority of the decline.
-
The Consumer Price Index slipped 0.5% month-on-month (mom) and 4.7% year-on-year (yoy). But the HICP, which is the benchmark for the euro area, fell 0.4% mom and 1.7% yoy compared with May 2008.
-
We expect the CPI to decline 4.3% on average in 2009 and 1.1% in 2010. For the HICP, we anticipate a drop of 1.3% this year and 0.7% next year.
Domestically-generated price pressures finally subsiding as spare capacity continues to increase
-
The positive aspect of the recession is that domestically-generated price pressures, which have persisted for many years, are finally subsiding.
-
The best guide to domestically-generated inflation is services prices, excluding mortgage interest. Note that we import the majority of our consumer goods.
-
Mortgage interest fell 4% mom. Excluding this, 'core' services (which make up about 46% of the CPI) rose only 2% yoy. That was the slowest rate of inflation since February 1998.
-
Within that, it was encouraging to see monthly price declines for some services influenced by the state — notably gas, electricity, and health and education.
Deflation in consumer price level not damaging
-
The drop in prices across the domestically-influenced parts of the consumer basket is not a worry. It simply means that prices are coming down with a lag from the phoney level of recent years — based on higher disposable income than today. If domestic costs and wages continue to decline, it will help our exporters.
Commenting on the latest CPI data, IBEC Senior Economist Fergal O’Brien said: "We are now seeing an adjustment in wages and prices across most sectors of the Irish economy and this will help make us more competitive. Hard pressed consumers are also clearly benefiting from lower prices and this will offset some of the impact of recent income tax increases.
"While the mortgage interest component has been the key factor in the CPI falling by 4.7%, the sharp decline in the harmonised index (which excludes mortgage interest) shows that price falls have occurred in a number of sectors. Food prices are now 2.5% lower than at the same time last year, while the price of clothing and footwear has fallen by 11%.
"One of the more interesting features of the latest CPI was the drop in doctors’ fees of 2.6% in the month of May. We need to see more of this type of price adjustment in the sheltered sectors of the economy if the competitiveness challenge is to be effectively tackled.
"The CPI is set to remain in negative territory until early next year and inflation will average about -5% for 2009. While a sustained deflationary spiral would be damaging for the economy this is unlikely to happen and the current price falls are a positive feature of the adjustment process currently happening in the economy."
Pat McArdle, chief economist Ulster Bank commented:
Deflationary forces strong but as expected in May…
The latest consumer price data for May show that prices were down 4.7% on a year earlier, again the greatest fall in the CPI since 1933. This drop was slightly greater the Reuters consensus forecast of minus 4.6% but in line wth the UB forecast for May. There is, therefore, little new or unexpected in this months’ release.
The HICP, i.e. the EU harmonised measure, which excludes mortgage rates, also fell significantly from 0.7% in April to minus 1.7% in May. This reflects the fact that the driving force in May was no longer interest rates. Mortgage rates did go down but falls in a range of other items, notably food, electricity, gas and rents were more influential. We can no longer say that price falls reflect interest rates only. In fact, our forecast for the HICP, which excludes interest rates, is now minus 1.25% for 2009 on average. The HICP is now clearly into negative territory.
Fall in mortgage interest rates no longer the main source of downward pressure on price levels …
Prices fell by 0.5% in the month of May whereas they increased by 0.8% in May 2008, so the swing factor was 1.3%, which brought the annual rate from minus 3.5% in April to minus 4.7% in May, after rounding. As can be seen from the Table below, the fall in mortgage interest rates accounted for 0.4 percentage points (pp), or just one-third, of the total change last month. Mortgage rates continue to edge down, the average bill was down 42.4% in May as compared with 38.7% in April, banks have clearly passed on the reductions.
It is clear from the final column of the table that other items in the housing and energy category were key last month. ESB price fell by 10.4%, on schedule, and gas prices were down 11.3% as earlier rise were partially unwound. Together, these accounted for a fall of 0.3pp while rents accounted for a further minus 0.1pp. Rents are now down 20% year-on-year with no end to the fall in sight. There were modest offsets from petrol and diesel prices which continue to rise.
Outside of housing and energy, the action was limited. Food prices continue to tick down, subtracting 0.1pp in May, as did transport, despite the petrol price increase, and restaurants and hotels. On the other hand, clothing and footwear was surprisingly resilient, adding 0.1pp but this followed a particularly weak April and the annual rate of decline in this category is still 10.8%.
Prices have further to fall …
While the mortgage rate reductions are largely over, the CPI will continue to fall over coming months. Price falls from now on, with some notable exceptions, will likely moderate but base effects will see the monthly rates go considerably more negative. We expect a few minus 6% readings after the Summer and this should give an average for the year around minus 4.25%. As mentioned above, the HICP will also be negative to the tune of minus 1.25%.
These forecasts are a bit below the recent Budget estimates but not significantly so – another indication that the forecasts underlying the April Budget were both conservative and realistic.
