Recession fears grow as inflation hits 4.7%

FEARS that the economy is heading into a recession have heightened after figures showed the cost of living continuing to soar and consumer spending in decline.

Rising fuel prices and increased mortgage costs pushed the rate of inflation to 4.7% last month, up from 4.3% in April.

This sharp hike comes amid a threat from the European Central Bank (ECB) that it will increase interest rates next month.

Economists are predicting inflation could climb to 4.9% in June and average over 4% for the year — well above figures predicted at the start of the year.

This high rate of inflation will eat into the household budget, cut spending on non-essential items and keep consumer spending weak, said Ulster Bank chief economist Pat McArdle.

The figures from the Central Statistics Office (CSO) showed consumer prices increased by 0.8% last month, compared to an increase of 0.4% in May last year.

Transport costs rose 4.5% over the year as a result of higher petrol and diesel prices while restaurant and hotel prices rose 3.4%&.

The cost of running a home is up about 10%, with electricity, gas and water costs all rising.

Fine Gael deputy leader Richard Bruton said in the months ahead consumers are facing demands for price increases from the electricity and gas companies.

“As Fine Gael has pointed out, electricity utilities are currently enjoying a massive windfall profit from the collection of carbon levies which are not being passed on to the consumer. It is simply unfair they should be pocketing this and then looking for price increases.”

The news was also bleak for first-time buyers yesterday, with AIB saying it is increasing rates on many of its mortgages.

A typical, four-year fixed rate mortgage for €300,000 over 30 years will increase by €103 per month for new AIB customers.

While its three-year fixed rate will remain unchanged at 5.25%, all of its other fixed rates are increasing.

Its standard tracker mortgage rates are also due to rise by 0.40% for new customers and most of its fixed rates are set to rise by between 0.45% and 0.60%.

In an effort to explain its decision, AIB said that having held off for as long as possible it must now increase some mortgage rates to reflect the “significantly increased cost of funds”.

Meanwhile, a report from analysts at Fitch Ratings said house prices will have lost a quarter of their value from their February 2007 peak by the end of next year. It said Irish house prices are likely to fall 10% this year and a further 5% next year.


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