Sunday 21 December 2014

Deflation threat as the cost of living rises just 0.2pc

Published 11/04/2014 | 02:30

Alan McQuaid of Merrion Stockbrokers
Alan McQuaid of Merrion Stockbrokers

THE cost of living is up by just 0.2pc in the last year, and there is a risk of deflation across Europe, an economist has warned.

Irish prices were up 0.7pc in March compared to the previous month but are just 0.2pc higher than a year ago, new Central Statistics Office figures show.

While education, alcohol and tobacco, restaurants and hotel prices all rose, the cost of clothes and shoes, communications, furniture and transport all fell.

Merrion stockbrokers economist Alan McQuaid said that although the cost of living rose slightly last month after falling by 0.1pc in the year to February, deflation rather than inflation remained the biggest threat to the economy and not just in Ireland.

"Euroland inflation currently stands at just 0.5pc, its lowest level in four years and way below the European Central Bank's target of close to 2pc," he said.

Although consumers obviously like to see prices drop, economists warn this can dampen growth because people hold off on making purchases in the hope of getting a better deal later, while debt becomes more of a burden.

Mr McQuaid said that unless European inflation picked up soon its central bank might be forced to cut interest rates further which could ironically push Irish inflation lower as tracker mortgage repayments would fall. The current ECB rate stands at a record low of just 0.25pc.

Domestic inflation was likely to be depressed for some time to come, though he expected an uptick later this year due to a strengthening jobs market prompting gradual wage rises.

The CSO figures show food and beverage prices are down 1.5pc in the last year, with big falls in the price of potatoes, vegetables and frozen fish.

Private rents rose by 10pc while mortgage interest repayments fell by 10.7pc – though it's tracker mortgage holders who got most of the benefit from this.

Airfares rose by 16pc in March but are only 1.8pc higher than a year ago, while petrol and diesel prices are around 5pc lower than last March.

Government measures to force down the price of drugs and encourage more sales of generic medicines may be bearing fruit as prescription drug prices are 9.6pc cheaper than a year ago.

Davy stockbrokers said that the Irish inflation rate was a poor indicator for positive trends in the economy as it was being kept low by external factors such as the low European interest rate and energy prices.

In fact the inflation rate for services excluding mortgage interest was running at 3.3pc in March which was the biggest increase since September 2012, said Davy analyst David McNamara.

The Irish Small and Medium Enterprises Association (ISME) warned that low overall inflation figures concealed high state-influenced costs for business. "It is ironic that even as we speak of the threat of deflation, the business cost inflation is submerged and hidden in the overall Consumer Price Index and gets ignored by government," said ISME chief executive Mark Fielding.

Irish Independent

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