Ireland sunk further into deflation in June as the cost of living fell at the fastest rate since the Great Depression, raising the prospect of a prolonged recession.

According to data from the Central Statistics Office (CSO) the annual rate of inflation is minus 5.4 per cent, dragged down by the falling cost of mortgages and household energy bills.

The CSO said the cost of living has fallen every month this year with mortgage interest repayments also down by 50 per cent. Prices have been falling since January and the cost of living, as measured by the consumer price index (CPI), declined by a further 0.3 per cent last month. The annual rate of deflation was minus 4.7 per cent in May.

There was a 25.6 per cent fall in housing costs and a 12.2 per cent reduction in clothing prices over the last year.

Prices of services fell 5.6 per cent in the year to June while electricity, gas and other fuels were 1.6 per cent lower.

The main deflationary momentum has come from lower mortgage interest costs following a series of rate cuts by the European Central Bank (ECB) since last October.

Alan McQuaid, economist with Bloxham's stockbrokers, said the last time prices fell as steeply as the last six months was during the Great Depression. But he said that there were some price increases last month, with petrol and diesel and car and home insurance prices all rising.

Mr McQuaid warned that deflation remains a bigger threat than inflation in the long term for Ireland. “In Ireland, falling nominal wages and profits will raise the real value of existing debts, increasing the need for a more prolonged period of deleveraging and raising the chance of a sharper rise in banks’ bad loans,” he said.

Because private sector indebtedness is equal to around 175 per cent of GDP, “a period of deflation could have a particularly negative impact on the Irish economy”.

Food price deflation in Ireland stretched to minus 3.3 per cent in June, the strongest pace of food price declines since at least 1990.

Mortgage interest costs have fallen by 46 per cent in the year to June. “Given the high level of indebtedness of Irish households, the effects of this cannot be underestimated and has clearly provided some relief to disposable incomes that have come under strong pressure over recent months,” commented Goodbody Stockbrokers in Dublin.

“The pace of decline in the Irish CPI thus far is unprecedented and highlights once again the open nature of the Irish economy.

“At this half way stage of the year deflation has averaged minus 3 per cent, although the trend has been an accelerating one. For the full year we expect an average rate of minus 3.6 per cent, while deflation is set to linger well into 2010 also.

“For that year we forecast an average further decline of minus 0.8 per cent in the general price level. Given the degree of spare capacity in the economy, price pressures will clearly remain subdued for some time to come.”

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