Source: CSO

Irish deflation eased in February as consumer prices fell at an annual rate of 3.2%, compared with 3.9% in January

The CSO said today that a combination of price hikes in key areas pushed up the monthly index by 0.4% compared with January. Clothing and footwear prices rose after the January sales; higher mortgage repayments and health insurance premiums also had an impact.

The main changes in the year were falls in Clothing & Footwear (-11.4%), Housing, Water, Electricity, Gas & Other Fuels (-10.6%), Food & Non-Alcoholic Beverages (-8.0%) and Furnishings, Household Equipment & Routine Household Maintenance (-4.8%). There were increases in Education (+10.6%), Transport (+3.9%) and Miscellaneous Goods & Services (+2.2%). Services prices fell by 2.9% in the year to February, while Goods fell by 3.6%.

The most significant monthly price changes were increases in Clothing & Footwear (+6.8%), Furnishings, Household Equipment & Routine Household Maintenance (+1.5%), Miscellaneous Goods&Services (+1.4%) and Housing, Water, Electricity, Gas&Other Fuels (+0.7%). There were decreases in Health (-2.1%) and Recreation & Culture (-0.8%).

The EU Harmonised Index of Consumer Prices (HICP) increased by 0.2% in the month. An increase of 0.2% was also recorded in February of last year. Prices on average, as measured by the HICP, were 2.4% lower in February compared with February 2009.

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

• Clothing & Footwear and Furnishings, Household Equipment & Routine Household Maintenance prices increased due to a recovery in prices following the traditional January sales.
• Health fell due to a reduction in prices for prescribed drugs.
• Housing, Water, Electricity, Gas & Other Fuels rose due to an increase in average mortgage interest repayments.
• Miscellaneous Goods & Services rose due to increases in premiums for private health insurance.

The CPI excluding tobacco index for February increased by 0.5% in the month and was down 3.4% in the year. The CPI excluding energy products rose by 0.5% in the month and fell by 4.1% in the year. The CPI excluding mortgage interest increased by 0.3% in the month and was down by 2.1% in the year.

Goodbody economist, Deirdre Ryan, commented:

Trend in price levels still very much downward - Although inflation is still deep in negative territory, the rate of decline has moderated sharply relative to earlier months. CPI data released this morning reveal a 3.2% drop in the index in the twelve months to February 2010, an easing on the 3.9% annual pace of decline seen in January. In the month, the CPI index recorded a 0.2% increase. This is still only the second time in the last 17 months where the index has risen on a monthly basis. Relative to Europe, the price adjustment process also remains in train, with the HICP down 2.4% yoy in February, the same pace of decline as in January. By contrast, inflation for the Euroarea as a whole was 1% yoy in February, indicative of the diverging trends in consumer prices between Ireland and the wider Euroarea at present.

First evidence of falling costs in public sector areas - The most striking feature of February’s CPI data is the reduction in health costs. Health costs fell 2.1% mom, while on an annual basis health inflation turned negative for the first time in the current index (-0.4% yoy). We have previously commented on the need for costs in publicly controlled areas to be reduced and this is the first evidence that this is occurring. Inflation still remains at a highly elevated level however in Education.

1% decline in CPI forecast for 2010 - As expected, the headline rate of inflation continues to moderate although the details provide evidence of a price adjustment where momentum remains in tact. For this, one only has to look at the less volatile HICP price gauge. We expect a further 1% decline in the CPI this year, with little, if any, upward pressure on price levels likely for an extended period.

Davy Chief economist, Rossa White, commented:

Prices rise thanks to typical seasonal factors; deflation will continue over the full year;

CPI and HICP up month-on-month following end of sales

• The Consumer Price Index (CPI) rose 0.4% month- on-month (mom) in February. The HICP – a much better guide to underlying price changes – increased 0.2%.
• Both indices nudged up following the end of winter sales at clothing/footwear (+6.8%), furniture and DIY outlets. That followed the typically large mom drop in prices in January (-0.6% for CPI; -0.7% for HICP). But there was plenty of ongoing price deflation in February too: food, alcohol, health (due to administered cuts in drug prices), education and recreation and culture all experienced lower prices versus January.
• The CPI increased by more than the HICP due to the 3% rise in mortgage interest. It added fully 0.2 percentage points to the CPI, accounting for the 0.4% rise compared with only 0.2% for the HICP.

Annual rate of deflation unchanged for HICP

• The rate of deflation for the HICP was 2.4%, exactly the same as in January. Prices will probably fall at more or less the same rate intra-year this year as during 2009. We forecast that the year-on-year rate for the HICP will be 2.2% as of December 2010; that compares with -2.6% in December 2009.
• Mortgage interest totally distorts the impression of price trends given by the CPI (the HICP has no mortgage component). Annual deflation may be only 0.9% at end-2010 for the CPI. That compares with -5% in December of last year.

Price deflation will continue through 2010

• On the basis of the CPI, it would seem that prices overall will begin to decline much more slowly soon; however, that is not the case, apart from banks pushing up mortgage rates.