Thursday, August 11, 2011

Reduced VAT and price changes

The July CPI is also the first the picks up the effect of the reduced VAT rate of 9% on the supply of certain goods and services. Details here.  We can use the CPI Detailed Sub-Indices to gauge some of the effect of the VAT reduction. The results are mixed.

VAT Price Changes

The price changes vary from a 4.1% drop in the price of newspapers (the full VAT reduction was passed on) to a 0.9% increase in the price of accommodation services.  Prices for cinema and hairdressing dropped by around 2%, with the cost of eating, canteens and takeaways all falling by less than 1%. 

Although the reduced rate of VAT is supposed to apply to cultural admittance and sports participation the price of both was unchanged in the month, though their prices are down more than 5% on the year.

All told, the categories listed here fell by 0.79% in the month and contributed to a monthly fall of less than 0.1% in the overall CPI.  Outside of newspapers it is hard to find significant evidence of the VAT reduction feeding through to price reductions.


  1. The CPI is published monthly but some price queries are only conducted quarterly. Cultural, heritage an other admittance is not surveyed in July, but in August. The same for sports admittance.

    More details here:

  2. Hi Anonymous,

    Thanks for that. Very useful. Given that the VAT reduction was well flagged it might have been worthwhile if the CSO had moved some of the quarterly price queries to July.

    Even then though, cultural admittance and sports participation only make up 0.8% of the index and are unlikely to change the overall results above. The monthly inflation of zero for these is incorrect but it does not change the fact that the only category that fell by something approaching the full amount of the VAT reduction was newspapers and periodicals.

  3. Seamus The most important role of the VAT cut is not so much the drop in prices rather its cash flow effect on the service sector. For example in a restaurant much of the inputs are zero rated making the net bi-monthly VAT payment a substantial proportion of gross turnover as there isn't a huge amount of VAT inputs to be claimed against the gross liability. It should be seen in this light rather than a once off price reduction.

    It should also help businesses to absorb costs as there is little possibility of putting up prices at present.

    The HICP rate fell again and remains considerably lower than almost anywhere else in the EU. Ireland is also completely unusual in that there is a substantial differential between our nominal rate of inflation and the HICP rate. This is down to the weightings given here in the CPI to housing, alcohol & tobacco.

    With possible falls in some energy costs, might we see negative HICP rates again before the end of the year?

  4. Niall, regarding your point on the (higher I presume?) weightings our national CPI put on housing...does this imply that even if banks in other eurozone countries were increasing variable rates in line with banks in Ireland that our CPI would still be proportionally larger as a result (all other things constant)?

    i.e. our mortgage interest inflation is made to look slightly worse than it is as we give the cateogry higher weights than other EZ countries?

  5. @ Rob Personal debt levels in almost all other EU countries is different to here. Only the Natherlands has levels of household debt close to ours. German debt is less than 60% of ours & the Italians are at around 30% of our levels. Most continental mortgages are fixed. Kathleen Barrington,formerly with the Sunday Business Post, now an advisor to Joan Burton, covered the issue very well in some of her columns in the SBP. Try her site for old articles,

    From an inflation point of view, there are three problems, a) we have more debt, b) we have more variable rates, & c) there is a technical issue in the way the CSO calculates the contribution to inflation made by mortgages. It is I gather mainly based on variable rates. The CSO suggests that this may be overstating Irish inflation.

  6. Seamus

    I think the CSO would probably suggest that maintaining the integrity of the series implies keeping to the existing timetable for quarterly inquiries.

    As for the other components you've identified there are may be seasonal aspects going on and a seasonally adjusted CPI is never published (nor in other countries to my knowledge).

    More broadly, disentangling one-off from cyclical and trend movements in a month-on-month CPI change is tricky - and that's before you even allow for possible bias from sampling error.

  7. Hi Seamus,

    as enough time has now passed to take into account seasonal variations on tourist accommodation prices and for the CSO to re-sample it's full basket of prices, is now a good time to update this post so we can see if the VAT reductions (paid for by future pensioners) were passed on or not?

    Also readers of this post may be interested in this from Richard Tol which would suggest that even if the savings are passed on to the consumer their is still no nett benefit