Deflation runs deeper

The annual rate of deflation in Ireland fell to 4.7% in May. The figures released by the CSO relate to the period June 2008 - May 2009. This was the biggest fall since 1933 and compares with an annual deflation rate of 3.5% in April. Directly compared with April prices fell by 0.5%. The main reasons for this were falls in mortgage repayments (due to as April's interest rate cut by the ECB). Rents also fell, while there was a reduction in electricity and gas costs.

Inflation drops sharply

Figures released today show that the annual rate of inflation eased sharply in November to 2.5% from 4% in October. This is the largest reduction since monthly records began. According to the Central Statistics Office, the overall cost of living here fell by almost 1% during November alone. Lower mortgage repayments as well as petrol and diesel price cuts were the main reasons for the reduction. The 2.5% annual rate is the lowest inflation has been for three years. All the signs suggest that further falls are likely in the months ahead. There is likely to be significant downward pressure on inflation coming from the strength of the euro against sterling. Although this means competitive challenges for Irish exporters, it also serves to make imported goods from the UK cheaper for Irish consumers.

Iceland's inflation now over 17%

The annual rate of inflation in Iceland has risen to a record high of 17.1% as the country battles the worst financial crisis in its history. The Icelandic statistics agency said prices rose in November alone by 1.74% compared to the previous month. Food prices increased fastest, up 30.6% over the year, as the country's currency plummeted. The agency warned that inflation rate could rise beyond 20% in the future, threatening the economy.

Inflation rate in Ireland drops again

In what will become the norm over the coming months, official figures today show that the annual rate of inflation fell back to 4% last month from 4.3% in September. The Central Statistics Office said lower petrol and diesel prices and falls in the prices of clothes and footwear were the main factors in the fall. The CSO said the figures did not include rises in excise duties announced in the Budget as they took effect after the figures were calculated.

The main factors contributing to the monthly change were as follows:

• Clothing & footwear, furnishings, household equipment and routine household maintenance decreased due to sales.
• Transport fell due to lower petrol and diesel prices and a decrease in airfares.
• Education rose due to the increases in primary, secondary and third level education.
• Miscellaneous goods & services rose due to an increase in childcare costs and higher house insurance premiums.

HICP inflation – the euro area standardised measure – was 2.7% year-on-year (note that it does not include a mortgage component). Inflation would actually be lower were it not for the Budget and the wage-price spiral in the public sector.

First we had 'stagflation'... now we have 'stagdeflation'

'Stagflation' is an economic term which came to prominence in the 1970s. It exists when we have stagnation (little or no economic growth and high and rising unemployment) along with rising inflation. Put basically, stagflation occurs when the economy isn't growing but prices are. One way stagflation could occur would be an increase in the price of oil in an oil-importing country, which tends to raise prices at the same time that it slows the economy by making production less profitable - causing firms to lay off workers. This happened to a great extent during the 1970s, when world oil prices rose dramatically during the the world oil crisis.

However, an economist has now coined a new phrase 'stagdeflation' for us to concern ourselves with. It comes from Nouriel Roubini (or 'Dr. Doom', as he has become known), pictured above, a professor of economics at New York University. He believes stagdeflation will, in six months, become the main worry for economic policymakers worldwide. Stagdeflation exists when we have low growth or recession along with falling inflation rates.

Why should we heed what Roubini says? Well, his predictions about the current global crisis have been uncannily correct. For example, he said in August 2006, "A housing hard landing will lead to a sharp and severe recession. It may also lead to a banking and financial crisis that may be more acute – and cause a more severe credit crunch – than the Savings and Loan crisis of the 1980s and early 1990s that led to the 1990-1991 recession". We will examine his forecasts further at a later date. He believes stagdeflation is happening already. The US recession is leading to deflation in areas where supply vastly exceeds demand (housing, consumer durables, motor vehicles, etc.). The unemployment rate is up sharply and commodity prices are down sharply - about 30% (from their July peak) in the last three months and, he believes, they are likely to fall much more in the next few months as the advanced economies' recession goes global. It will be interesting to see how his predictions pan out in 2009.

New York Times profile of Roubini, 17 August 2008
Roubini on the financial crisis, 15 July 2008, Bloomberg TV

Poundshops and Inflation

Here's a good article about poundshops in Britain and how they are affected by inflation.

1. What type of goods do such shops deal in
(a) normal goods?
(b) inferior goods?
(c) veblen goods?
(d) giffen goods?

2. What kind of income elasticity of demand figure would you expect them to have?

The answers tomorrow.