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News : Irish Last Updated: Jan 15, 2010 - 7:45:12 AM

Irish Consumer Prices fell by 5.0% in the year to December 2009 - - first full-year decline since 1931
By Finfacts Team
Jan 14, 2010 - 12:56:10 PM

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Source: CSO

Irish Consumer Prices in December, as measured by the CPI (Consumer Price Index) fell by 0.5% in the month, according to the CSO. This compares to a decrease of 1.2% recorded in December of last year. As a result, prices on average, as measured by the CPI, were 5.0% lower in December compared with December 2008. It was the first full-year decline since 1931.

The EU Harmonised Index of Consumer Prices (HCP) also decreased by 0.5% in the month compared to a decrease of 0.7% in December of last year. Prices on average, as measured by the HICP, were 2.6% lower in December compared with
December 2008.

The most notable changes in the year were decreases in Housing, Water, Electricity, Gas & Other Fuels (-21.2%), Clothing & Footwear (-14.7%), Food & Non-Alcoholic Beverages (-8.1%), and Furnishings, Household Equipment & Routine Household Maintenance (-4.8%). There were increases in Education (+11.3%), Miscellaneous Goods&Services (+5.4%), Health (+2.5%), Transport (+2.1%) and Alcoholic Beverages & Tobacco (+1.2%).

Services prices fell by 5.1% in the year to December, while Goods fell by 4.8%.

The most significant monthly price changes were decreases in Clothing & Footwear (-3.6%), Alcoholic Beverages & Tobacco (-1.5%), Transport (-0.8%), Food & Non-Alcoholic Beverages (-0.5%) and Restaurants & Hotels (-0.4%).

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

Clothing & Footwear fell with lower prices for both clothing and footwear as sales continued.

Alcoholic Beverages & Tobacco fell as a result of decreases in the price of spirts and wine sold in supermarkets and off licences. Transport fell due to lower prices for new and second-hand cars. Food & Non-Alcoholic Beverages fell due to lower prices across a wide range of products.

The CPI excluding tobacco index for December fell by 0.5% in the month and was down 5.4% in the year. The CPI excluding energy products decreased by 0.5% in the month and decreased by 5.7% in the year. The CPI excluding mortgage interest fell by 0.6% in the month and was down by 2.2% in the year.

Davy chief economist, Rossa White, commented:

Prices continued to fall in December; encouraging that HICP was down by 0.5%

  • Both the Consumer Price Index (CPI) and the HICP fell 0.5% in December. That meant the year-on-year rates were -5.0% and -2.6% respectively (note that monthly price drops were bigger back in December 2008 mainly due to energy declines at that time).
  • We always prefer to focus on the HICP for two reasons. First, it is the standard comparable measure across the EU-27. Second, it excludes mortgage payments, which have temporarily fallen during the recession but will soon revert towards the mean.
  • The HICP dropped for a fourth straight month (down 3.9% from peak). On average, it fell 1.7% in 2009 (full year 2009 versus 2008) – the first time there has been annual deflation in Ireland. This is good news as it both underpinned real incomes and improved cost competitiveness across the economy.

Eleven of the twelve components of the price basket saw prices either decline or remain unchanged in December

  • Keep in mind that the Budget had no impact on the December figures: the survey was conducted on December 8th, the day before the carbon tax and changes to excise duty were announced.
  • Deflation was widespread. Clothing and footwear (-3.6% month-on-month) and alcoholic beverages
    (-1.5%) recorded the biggest price declines. That reflected earlier than usual sales for clothing and perhaps some price discounting on alcohol in order to compete with cross-border outlets in the lead-up to Christmas. Food, furnishings, transport, restaurants and hotels and recreation/culture also saw deflation.

Prices set to drop further from here; HICP by more

  • We expect the HICP to decline 1.7% on average in 2010 versus 2009, whereas the CPI may fall by 1%.

Goodbody economist, Deirdre Ryan, commented:

First full year decline in prices in almost 80 years confirmed

Following the release of today’s CPI data for the final month of the year, we can now confirm that 2009 witnessed the largest decline in consumer prices seen in the Irish economy since 1931. In 2009 the CPI declined by an average 4.5%, while in the final month of the year deflation stood at an annual rate of 5% yoy.

Price declines becoming increasingly more widespread

One of the more prominent aspects of the decline in the CPI over the past 12 months has been the role played by the collapse in mortgage interest costs. These fell by 39% yoy in December and accounted for 60% of the overall annual decline in the CPI. However, the decline in consumer prices became progressively broader based as the year advanced, and in December the 0.5% monthly reduction in the CPI was achieved without any contribution from the mortgage interest component. Furthermore, the CPI excluding mortgage interest and energy was down 2.5% yoy in December, its fastest rate of decline yet.

A lot done, more to do

Impressive progress was made in Ireland’s consumer price adjustment throughout 2009. This is further underlined by the 1.7% full year decline in the HICP in 2009 compared to a 0.3% average increase in prices in the Eurozone. The fact that almost all categories are now exhibiting falling prices is also encouraging. Nevertheless, there is still further to go and while price deflation is likely to become more subdued in the months ahead (and likely turn positive by year end on an annual basis as mortgage interest rates start to increase), we still expect a further full year decline in prices of close to 1% on average in 2010.

Small Firms Association:

The Director of the Small Firms Association, Patricia Callan, has stated that the 4.5% annual average rate of deflation in 2009, is clear evidence of the pressures on small businesses to regain cost-competitiveness, so that they can drop prices charged to customers and maintain market share.

In particular, the figures clearly show the continuing pressures facing the retail sector, with an average decrease of 11.7% on Clothing & Footwear prices in 2009. Callan stated the “the retail sector is heavily dependent on good sales at the Christmas period to carry them through seasonal troughs, and the fact that many stores had to discount their prices heavily and have pre-Christmas sales, in order to move stock, along with the bad weather immediately post-Christmas, will leave many stores in a vulnerable position this month, and we expect to see the implementation of further short-time, lay-offs and redundancies as a result”.

Callan called on the government to start taking the issue of restoring national cost-competitiveness seriously, in particular in the sectors where it has direct control over pricing. CSO figures show that the overall increase in the CPI from 2005 to 2009 was 8.4%, yet the equivalent rises in Education costs was 24.4%, House, Water, Electricity & Other Fuels was 19.4% and Health was 17.9%. “The Government needs to take firm action to bring the costs it imposes on the economy back in line with the CPI, so that it is not having knock-on negative impacts on small businesses who are fighting for survival”, commented Callan. She called on the Government to immediately impose a price freeze on all publicly administered services for 2010 and specifically to instruct all local authorities to decrease commercial rates by 10% in 2010. These increased on average by 2.7% in 2009, despite annual deflation of 4.5%, and have vastly exceeded the inflation rate for many years. “When public sector inefficiencies are passed onto the rest of the economy in the form of indirect tax increases and charges, competitiveness deteriorates and jobs are lost. Our inflation rate is a key component in regaining lost competitiveness.”

“Whilst deflation experienced in the economy in 2009, has helped our cost-competitiveness position”, Callan warned against
“a continuing significant downward trend in 2010, as this could result in us getting caught up in a spiral of deflation, such as occurred in Japan, which would detrimental to all. Restoring consumer confidence in 2010 must be a key national priority.”

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