Consumer prices fell 5 per cent in the year to December as fuel, clothing and food prices all saw a decline.
Analysts said the fall in prices throughout 2009 was the largest in almost 80 years. One of the key changes was seen in housing, water, electricity, gas and other fuels, which fell 21.2 per cent over the course of the year.
Clothing and footwear also reduced in price, slipping 14.7 per cent. An 8.1 per cent decline was seen in food and non-alcoholic beverages, while prices for furnishings, household equipment and routine household maintenance were down 4.8 per cent during the year.
Services prices were also down, falling 5.1 per cent in the year to December 2009, and the cost of goods slipped 4.8 per cent.
There some increases seen during the period, with education rising 11 per cent. Health costs rose 2.5 per cent, while transport increased 2.1 per cent.
According to the Central Statistics Office, the annual average rate of inflation in 2009 was -4.5 per cent, compared to a rise of 4.1 per cent in 2008 and 4.9 per cent for 2007.
Inflation hit its lowest in October, when prices fell an average of 6.6 per cent.
A major contributor to the fall in prices was mortgage interest, which decreased by an average of 40 per cent throughout 2009. The Consumer Price Index fell only 1.2 per cent for 2009 when mortgage interest was excluded.
On a monthly basis, prices fell 0.5 per cent in December compared to a decline of 1.2 per cent in December 2008.
The most significant decreases were seen in the prices for clothing and footwear, which fell 3.6 per cent in December, and alcohol and tobacco, which declined 1.5 per cent as supermarkets and off licences lowered prices for wine and spirits.
Davy analyst Rossa White said the falls in clothing and footwear reflected earlier than usual sales.
Lower prices for new and second-hand cars led to a fall of 0.8 per cent in transport costs during December.
Goodbody stockbrokers said the fall in prices for the year was the largest since 1931, describing the price adjustment as "impressive".
"One of the more prominent aspects of the decline in the CPI over the past 12 months has been the role played by the collapse in mortgage interest costs. These fell by 39 per cent year on year in December and accounted for 60 per cent of the overall annual decline in the CPI," said analyst Deirdre Ryan.
"However, the decline in consumer prices became progressively broader based as the year advanced, and in December the 0.5 per cent monthly reduction in the CPI was achieved without any contribution from the mortgage interest component. Furthermore, the CPI excluding mortgage interest and energy was down 2.5 per cent year on year in December, its fastest rate of decline yet."
Ms Ryan said price deflation would likely become more subdued and could turn positive by the end of the year as mortgage interest rates began to increase. However, the broker is predicting a further full year decline in prices of close to 1 per cent on average in 2010.
The EU Harmonised Index of Consumer Prices (HCP) showed a similar monthly decline of 0.5 per cent, marginally up from a 0.7 per cent fall in 2008. The measure showed prices were on average 2.6 per cent lower in December than a year earlier.
Davy's Rossa White noted the fall in HICP for the year as a positive indicator, as it underpins real incomes and improves cost competitiveness.
"We expect the HICP to decline 1.7 per cent on average in 2010 versus 2009, whereas the CPI may fall by 1 per cent," White said.
Bloxham analyst Alan McQuaid said there were concerns about inflationary threats from asset price bubbles as prices begin to pick up across the globe.
"We think these worries are premature," he wrote in a not. "When thinking about the outlook for inflation we would continue to give far more weight to real world factors, notably the still high levels of unemployment and ample spare capacity. It is also worth noting that the trends in broad money and credit aggregates also suggest that deflation remains a bigger threat than inflation in the short-term."
Bloxham said its analysts expect prices to continue to be lower year-on-year in 2010, but the annual average fall this year should be less than 1.0 per cent.
However, the Irish Small and Medium Enterprises Association (Isme) said that businesses were still suffering excessive costs, despite the fall in consumer prices.
“With negative inflation averaging 4.5 per cent in 2009, the reality is that the business sector still continues to pay non-competitive prices for many business inputs, including energy, transport, local charges and waste. Even the imminent reduction in gas prices will be negated by the ridiculous carbon tax, which has already impacted on cost competitiveness by increasing transport costs," said Isme chief executive, Mark Fielding.
“The reality is that the State continues to levy excessive charges on the business sector, with little or no thought given to our perilous competitive position, which is only increasing company closures and job losses."
The group called on the Government to carry out an immediate review of business costs and to introduce measures to reduce them in line with inflation.
Labour spokeswoman on social and family affairs Roisin Shortall said deflation of 5 per cent would seem to provide "justification of sorts", for the reductions in social welfare payments that were announced in the November budget.
However, Ms Shortall said the figures underlying the headline numbers were fear more revealing. "The European Harmonised Index of Consumer Prices (HICP) measure of inflation is the accepted measure at EU level as it tends to be less volatile and excludes interest rate changes.
"Deflation as measured by today's HCIP figure is running at just 2.1 per cent, which means that despite claims from Fianna Fáil and the Greens that social welfare recipients are actually better off now compared to last year, the 4.1 per cent cut in welfare rates, on top of the 2 per cent cut through the loss of the Christmas bonus, leaves them considerably worse off," Ms Shortall said.
