Falling inflation is a welcome relief for household budgets, but living costs will continue to rise, writes Niall Brady
Families breathed a sigh of relief last month thanks to the news that inflation had begun to ease.
Aggressive discounts and supermarket promotions in December caused the first drop in the annual inflation rate in four months, according to the Central Statistics Office (CSO). Inflation, as measured by the consumer price index (CPI), was 2.5% down from 2.9% in November.
Economists expect the annual rate of inflation to continue to fall this year, despite an increase in VAT from 21% to 23% from January 1, providing a respite to households that have seen an unprecedented squeeze on their budgets.
A low level of headline inflation, however, will mask price shocks in some sectors. Juliet Tennent at Goodbody Stockbrokers said: “Energy was a major contributor to the increase in prices in the 12 months to December, representing one third of the increase in the CPI. The recent fall in the value of the euro and changes in VAT and carbon taxes have pushed prices up further.”
The cost of health insurance is rising too. VHI says that premiums will rise by 6% to 12.5% from March 1. Quinn Healthcare will increase its prices by an average of 6% from the same date. Aviva Health will move even sooner, raising premiums by 15% for policies renewed from February 15th. Meanwhile, savers have been urged to beware of locking into fixed deposits paying high rates of interest, even though the offer the best chance of beating inflation. Advisers say these accounts limit the flexibility needed to deal with an uncertain economy.
We look at how you can make sure your family benefits from lower inflation.
Households worried by rising energy prices can lock in electricity and gas charges until March 31, 2012, after Electric Ireland launched the country’s first fixed tariff last week.
Simon Moynihan of bonkers.ie, a price comparison site, estimates the deal would freeze electricity and gas bills at €2,021 a year for an average household - €218 more than the best variable price tariff.
“If energy prices went up in six months by as much as they did last October, you’d probably be a little ahead of the game when the fixed tariff expires,” he said. The deal locks you into a contract until March 2013 and requires that you sign up both gas and electricity.
Households prepared to take their chances with rising energy prices would pay about €1,803 under Electric Ireland’s new dual-fuel plan aimed at winning back former customers. “If you’ve switched before, this cold be the deal for you,” said Moynihan. “If you’ve been a Bord Gais electricity customer for some time, you’re no longer entitled to its best rates. The same is true of Airtricity.”
Electric Ireland offers a discount of 14% on standard electricity rates and 6% on gas – or vice versa. “For a household with average consumption, taking the biggest discount on electricity is the best value,” said Moynihan.
Another new tariff, costing €1,853 on average for electricity and gas is aimed at existing customers of Electric Ireland coming to the end of 12-month introductory discounts.
“If you’re a serial switcher and exhausted introductory discounts at Bord Gais and Airtricity before returning to Electric Ireland last year, this could be for you,” said Moynihan. “It’s not the best deal – it’s there to keep you sweet after the introductory discount runs out.”
Inflation may be falling, but savers will still struggle to keep pace with price rises. They need at least 3.57% to earn a real return after deposit interest retention tax (DIRT), which increased to 30% on January 1.
Those locking up their savings for longer than 12 months must secure 3.73%% because DIRT on these accounts is 33%.
The most competitive deposit rate is 4.52% a year from Investec bank, but savers must lock away at least €20,000 for 18 months. Permanent TSB pays 4.47% a year with a fixed term of 26 months.
Alan McCarthy of Axa Financial, which sells investment funds warned that savers may be trapped until maturity or suffer interest penalties if they leave early. “It is difficult to imagine that the eurozone can overcome its debt problems without some element of currency devaluation,” he said. “If this is the case a fixed-term account is not the optimal location. Accessibility and speed to effect change are critical.”
You could earn better returns for less risk by investing in bonds issued by the Irish state which has a better credit rating than the banks it now owns. Returns on five-year Irish government bonds were 5.92% last week, and they can be bought and sold on the stock exchange at any time.
State Savings pay lower returns, with savings certificate averaging 3.53% tax free annually over five years and six months. You can get your money back at any time – unlike government bonds, which may be worth less than you paid to sell them if you sell before maturity.
What went up and what came down last year
Changes in the consumer price index in 2011
Mortgage interest increased by 14.1%
Electricity increased by 11.5%
Gas increased by 20.5%
Diesel increased by 11.3%
Bus fares increased by 10%
Health insurance increased by 22.9%
Third level education increased by 13.4%
Nightclubs down 6.8%
Restaurants down 2.1%
Consumer electronics down 9.1%
Air transport down 5.7%