Source: CSO

Irish consumer prices fell 6.5% in the year to September, as deflation deepened to the steepest level since 1922, when the Irish State was founded.

Consumer prices in September, as measured by the CPI, decreased by 0.4% in the month. This compares to an increase of 0.3% recorded in September of last year.

Using the European Union measure, Ireland has been heading the Eurozone rankings for price falls in recent months, which partly reflects the plunge in consumer spending and the price cutting of retailers in response.

The annual decline in the CPI has deepened from 4.7% in May to 6.5% in September.

The CSO said today that the EU Harmonised Index of Consumer Prices (HICP) also fell by 0.4% in the month, compared to an increase of 0.3% in September of last year. As a result, prices on average, as measured by the HICP, were 3.0% lower in September compared with September 2008.

The most notable changes in the year were decreases in Housing, Water, Electricity, Gas & Other Fuels (-28.5%), Clothing & Footwear (-13.8%), Food & Non-Alcoholic Beverages (-6.0%) and Transport (-4.0%). There were increases in Miscellaneous Goods & Services (+7.6%), Alcoholic Beverages & Tobacco (+7.5%), Education (+3.9%) and Health (+2.5%).

Services prices fell by 7.5%in the year to September, while Goods fell by 5.3%. The most significant monthly price changes were decreases in Food&Non-Alcoholic Beverages (-1.3%) and Transport (-0.9%). There was an increase in Clothing & Footwear (+3.6%).

The main factors contributing to the monthly change were as follows:

• Food & Non-Alcoholic Beverages fell due to lower prices across a wide range of food items.
• Clothing &Footwear rose due to a further recovery from the traditional summer sales.
• Transport fell due to decreases in airfares.

The CPI excluding tobacco index for September decreased by 0.4% in the month and was down 7.1% in the year. The CPI excluding energy products index fell by 0.4% in the month and decreased by 6.1% in the year. The CPI excluding mortgage interest decreased by 0.3% in the month and was down by 2.4% in the year.

Aggressive price cutting by retailers evident in inflation figures - Retail Ireland

Retail Ireland, the IBEC group that represents the Irish retail sector, today said that aggressive price cutting by retailers is evident in new inflation figures.

Responding to today's Consumer Price Index (CPI) figures published by the Central Statistics Office (CSO), Retail Ireland Director Torlach Denihan said: “Today's figures are proof of both increased value for money for consumers and the extreme level of competition in the retail sector.

"Over the last year consumers have benefited from price falls as follows: food -6%, clothing – 14%, footwear -13.3%, furniture – 6.5%, carpets - -8%, consumer electronics – 15.1%, home computers -25.2% and toys -12.1%.

"Despite these price falls, retail sales are poor and 29,000 former retailer workers joined the Live Register in the last year. The Government must take decisive action to support employment in the retail sector and address the serious problems of cross-border shopping, flat consumer demand and an uncompetitive cost base."

Retail Ireland has proposed that the Government:

• Reduce the excise levels on alcohol, as alcohol is the single biggest motivation for cross-border shopping trips;
• Reduce VAT to stimulate retail sales;
• Cut State-controlled costs on the retail sector, such as commercial rates, waste disposal charges and electricity prices;
• Reduce the regulatory burden on retailers.

Goodbody economist Deirdre Ryan commented:

Deflation of - 6.5% yoy in September- - After a short pause last month, the pace of Irish deflation resumed its accelerating trend in September and advanced to an historic rate of decline of -6.5% yoy .This was ahead of the -5.9% rate of CPI deflation that had been recorded for the previous two months. In relation to the Europe wide measure, the HICP, it’s clear that a realigning of prices relative to the rest of the Euroarea remains in train. This Irish HICP inflation indicator fell 3% in the twelve months to September, which compares to an average inflation rate of -0.3% for the Euroarea as a whole. Inflation as measured by the HICP has been negative for seven months now, relative to four annual declines in the Euroarea HICP. If evidence was needed, this confirms the extent of the emerging degree of slack in the Irish economy relative to elsewhere.

Monthly decline in index spread across a number of areas - - Following last months moderate increase in prices (the CPI increased 0.4% mom in August), concerns had been raised that the period of declining consumer price was nearing a close. This latest data shows this is far from the case, with a 0.4% decline on a monthly basis in the September CPI, reversing all of the last months increase. In September, the main downward influences on the index were food and non alcoholic beverages (-1.3% mom), transport costs (-0.9% mom) and restaurant and hotel costs (-0.4% mom). In relation to food prices, the intense competition that has emerged among food retailers, and the resulting price war, has seen declines in food prices which are unparalleled internationally. On an annual basis, Irish food price deflation extended to -5.9% yoy in September, relative to -3.3% yoy at the end of Q2. This compares to the UK where food prices are still ahead 1.9% yoy and the US where food inflation is 0.4% on an annual basis. Even in the Euroarea, food prices have declined a relatively moderate 1.3% in the year to August.

Falling food prices account for over half of quarterly decline in the CPI - - These trends have seen the food and beverage component of the CPI make a more significant contribution to the CPI decline, accounting for over half of the decline in the index in Q3. Over the past twelve months, Irish deflation has been dominated by falling mortgage interest costs although the recent trends indicate that this is no longer the case. In the year to September falling mortgage interest costs accounted for two thirds of the decline in the CPI. Yet in Q3, mortgage interest costs actually registered a slight increase and as such contributed positively to the index. As highlighted above consumer price declines have become much broader based of late and indicates that a wider segment of the population beyond mortgage holders are now beginning to reap the benefits of lower costs.

CPI trends may input into Budget 2010 adjustments - - With the all important Budget 2010 edging ever closer, the Government have already indicated that expenditure cuts will form the bulk of the fiscal adjustment for next year. As we have pointed out previously this cannot be the case without meaningful reductions to public sector pay and social welfare spending. These latest data, and in particular the more widespread nature of the decline in the CPI, will support any argument for reductions in these areas of spending. The data also indicate an ongoing improvement in relation to the restoration of competitiveness, a development we also view as very encouraging.

Brian Devine, NCB Stockbrokers: Signs of competitive deflation in Irish CPI:

• The CPI declined by -0.4% in September to leave the annual rate at -6.5% y/y. The CSO statistic is not seasonally adjusted, when seasonal factors are taken into account the monthly decline was -0.6% which illustrates that deflation is continuing in the economy.
• The main factors contributing to the monthly change were as follows: Food & Non-Alcoholic Beverages fell due to lower prices across a wide range of food items; Clothing &Footwear rose due to a further recovery from the traditional summer sales and Transport fell due to decreases in airfares. There was also a fall in Health prices and stagnation in Education prices, both of which had been rising over the last year.
• To date the majority of the fall in the CPI has been attributable to external factors such as energy and mortgage interest rates. However, the CPI data are also starting to show signs of competitive deflation via wage cuts and a general adjustment in prices as our core CPI index excluding energy, mortgage interest rates and food is now down -0.8% y/y compared with -0.3%y/y in August. Vis-à-vis our Euro area counterparts Ireland is becoming more competitive as core inflation in the Euro area is at 1.2%. We would expect Ireland to continue to gain in competiveness as wage cuts filter through to prices. The quicker the competitive adjustment takes place the quicker Ireland can rebound. Public sector pay cuts and streamlining the public sector promotion are an important part in this process. The longer Ireland takes to reform, the longer the economy will be stuck in a deflationary environment. Thankfully the Government appears to be focused on delivering public sector reform in Budget 2010.

Window of deflation will soften impact of fiscal corrections – IBEC

Commenting on the new CSO figures, IBEC Senior Economist Fergal O’Brien said:"We are now in unprecedented territory in the post-war era in relation to price changes. While a sustained period of falling prices would be very damaging for businesses and the wider economy we do not believe that such a deflationary spiral will develop. This window of deflation will be important in protecting real living standards in the face of necessary adjustments to public expenditure and pay.

"Prices are now falling across almost all sectors of the economy, but the most stark reductions in recent months have occurred in the grocery sector, where prices are down 6% in the year and fell by 1.3% in the month of September alone. There are a number of factors influencing this, such as exchange rates and global commodity prices, but these factors are unlikely to remain beyond next year."