Recession
Monthly increase in inflation in August - the first since September 2008…
By Lynsey Clemenger - Economist Ulster Bank
Sep 10, 2009 - 2:05:41 PM

The latest consumer price figures for August show that prices rose by 0.4% compared with July, to leave the annual rate unchanged from a month earlier at 5.9%. This was a larger rise than the 0.2% expected by the Bloomberg consensus forecast, and the first monthly increase since September 2008.  On a HICP basis, which is the EU harmonised measure and excludes mortgage rates, prices rose by a lower 0.2% in August, indicating that rising mortgage interest rates were a major source of upward pressure on prices in the month. Prices according to the HICP fell by 2.4% from August 2008, compared with an estimated fall of 0.2% in the Euro zone – a divergence of a significant 2.2 percentage points.

… driven by price rises in mortgage interest payments, clothing and footwear, and transport costs…

Prices rose by 0.4% in the month of August whereas they increased by 0.5% in August 2008, so the swing factor was 0.1%, which left the annual rate unchanged at 5.9% (after rounding). Following nine consecutive monthly falls, the average mortgage interest bill in August rose by 3.4% on the previous month, which contributed some 0.2 percentage points (pp) to the monthly rise of 0.4%. Despite this monthly increase, mortgage interest payments remained down a significant 48.2% on last year.

In addition to the monthly rise in mortgage interest payments, transport prices rose by 1.1% from July, driven by an increase in petrol, diesel and air-fare prices, and contributed a further 0.1 pp to the increase in the month. Following the large (summer sales related) monthly fall in July, prices of clothing and footwear rose by 3.4% in August, also making up 0.1 pp of the monthly rise. Working to partially offset the price rises in these categories was a further 0.9% fall in food prices, which represented the seventh consecutive month of price decline.

Looking at the more general core goods and services breakdown of consumer prices, goods excluding energy prices turned negative in February of this year and have continued to trend downwards, whereas the annual rate of change in core services prices (excluding mortgage interest, electricity and piped gas) has remained in positive territory. Core services prices actually ticked up in y/y terms in August, primarily driven by the rise in insurance costs over the course of the year, albeit that we expect the former will trend down in coming months given the underlying weakness in the economy at present.

…however, prices have further to fall in coming months

With the mortgage rate reductions over and with crude oil prices well off their lows earlier in the year, monthly price falls in the remaining months of the year will be increasingly harder to come by and of a smaller magnitude. However, base effects will likely see the annual rate of CPI inflation moving slightly lower in coming months before becoming less negative in November and December. For the year as a whole we expect an average consumer price fall of 4.2%, which would represent the greatest decrease since the 6.4% drop in 1931.

Lynsey Clemenger

Economist

Phone: 01 643 1565

Group Economics

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