Goodbody economist, Deirdre Ryan, commented:

Prices continue to fall but base effects coming into play: While the reduction in Irish consumer price levels that has been underway for the past number of quarters has continued into 2010, the favourable base effects that were in place for much of last year are beginning to unwind. This can be seen in the latest CPI inflation release for January, where the annual rate of deflation slowed to 3.9%, its lowest rate in 10 months. However, this largely reflects the fact that mortgage interest costs are no longer having the overriding influence on the index that was the case for much of last year. In fact, while the overall rate of deflation is beginning to slow, core deflation, which excludes energy and mortgage interest costs, is on an accelerating trend. Core deflation stood at -2.8% yoy in January, its fastest rate yet.

Continued progress in narrowing the gap with the EU being made...: We estimate that the consumer price differential between Ireland and the EU has fallen from 20% to 16%. In addition to this, property prices have also declined substantially. House prices have fallen in excess of 30% from peak levels, while residential rents are down 25% from the peak, with declines ongoing. The Irish consumer cost base is certainly adjusting at a rapid pace. The HICP was down 2.4% yoy in January, relative to a Eurozone average HICP increase of 0.9% yoy.

...but more to go: There is still much to go in terms of this adjustment however. We estimate a further 1% decline in the CPI this year. While this is less than the 2009 CPI decline (-4.5%), the fact that cost reductions are becoming increasingly more widespread is very encouraging.

Retail Ireland, the IBEC group that represents the Irish retail sector, today said that continued 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 ever increasing value for money for consumers and the ferocious level of competition in the retail sector.

"Over the last year consumers have benefited from price falls as follows: food -8.2%, clothing –11.2%, footwear -8.1%, furniture – 6.4%, household textiles - 18.7%, consumer electronics – 13.2%, home computers -27.4% and toys -9.3%.

"Notwithstanding these price reductions, figures released last Tuesday by the CSO revealed that the largest annual fall on record in retail sales took place in 2009. Retailers have cut costs in an effort to save jobs and reduce prices.

"Unless landlords face up to their responsibilities and cut rents, more retail employees will join the 30,000 former retailer workers who went on the Live Register in the last year. The Government must engage with recalcitrant landlords and, where necessary, their financial backers, to encourage them to do their part in helping the retail sector regain lost competitiveness, preserve employment and deliver lower prices to the consumer."

Davy chief economist, Rossa White, commented:

Deflation ongoing but will moderate slightly during 2010

CPI down 0.6%; HICP 0.7% lower in January

• The CPI fell 0.6% month-on-month in January, resulting in a year-on-year (yoy) decline of 3.9%.
• The HICP – which is comparable across the EU – fell 0.7% for a yoy rate of -2.4%. Prices are now back to where they were in March 2007.
• We expect the HICP to continue to fall gradually during 2010. In December 2010, the annual rate will probably be around -2%.

Usual suspects still causing most of the price pressure

• The parts of the economy exposed to both the domestic recession and impacted by foreign exchange trends have experienced the biggest price deflation. But it is noticeable that protected non-traded sectors (most of them influenced by the state) continue to raise prices rather than cut them.
• One other factor is worth noting in January. For the very first time, the price of services (ex-mortgages) fell yoy. Remember that services are the best guide to domestic economic conditions, so the annual price decline of 1.2% suggests that the private cost base is finally beginning to come down significantly.

Rate of decline in CPI will be less marked during 2010 as mortgage rates begin to rise slowly

• As for the CPI, the picture is slightly clouded by the outlook for mortgage rates. But assuming that the ECB refi rate hits 1.5% by year-end and banks begin tentatively to nudge up mortgage margins during the year, CPI deflation will be less marked by year-end. The decline in the CPI in the 12 months to December 2010 may moderate towards -0.1% versus our forecast of -2.1% for the HICP.
• Our full-year average inflation forecasts (12 months of 2010 compared with the 12 months of 2009) are -2.3% for the CPI and -2.5% for the HICP.