Ireland's annual inflation rate rose to its highest in nearly two years Thursday, but economists cautioned that the recession-hit country remains under deflationary pressure with more massive budget cuts looming.
The Central Statistics Office said average prices in September were 0.5 percent higher than 12 months earlier. However, prices slid a further 0.1 percent in September from the previous month on the back of lower transport costs, particularly air tickets.
Analysts said Ireland has yet to escape its deflationary cycle begun in 2009 as double-digit unemployment returned to the country for the first time since the mid-1990s.
Ireland, a nation of 4.5 million, is bracing for its fourth emergency budget in three years in December, when the government plans to slash more than euro4 billion ($5.58 billion) from the country's 2011 deficit through a combination of spending cuts and higher taxes.
The austerity _ required to reverse Ireland's deficit forecast this year to reach a post-war European record of 32 percent of GDP _ is set to continue through 2014, when the government hopes to reduce the deficit to the eurozone limit of 3 percent.
"In overall terms it would be wrong to assume that the threat of deflation has gone away completely," said Alan McQuaid, chief economist at Bloxham Stockbrokers in Dublin. "... Tighter fiscal policy will only add to the disinflationary pressures during the next year or two."
The Irish Business and Employers Confederation, a lobbying group that represents more than 7,000 employers in Ireland, forecast that average prices at the end of 2010 would be 1 percent lower than in 2009, while prices wouldn't return to 2008 levels until 2013.
Fergal O'Brien, the organization's chief economist, said the recent "somewhat surprising" strengthening of the euro versus the British pound and U.S. dollar _ the currencies of Ireland's two major trading partners _ also was reducing the cost of imported goods and services. The euro is currently trading at 8-month highs.
While the cost of most retail goods and services has fallen amid depressed consumer demand, the price of government-regulated services has kept rising for the past year. The report said education costs rose 9.5 percent, housing and utilities 8.5 percent, and telecommunications 2.9 percent.
Avine McNally, director of Ireland's Small Firms Association, said government regulators must do more to control the cost of gas, electricity and phones for business users or else Ireland's unemployment rate will soon exceed 14 percent, the second-highest in the euro zone behind Spain.
"Irish small businesses have taken harsh steps to regain cost-competitiveness, but any gains are negated by the costs imposed by the government-administered sector," she said.
Inflation report, http://www.cso.ie