Prolonged deflation to continue here until 2011 as prices fall 6pc
Saturday November 14 2009
AS prices continue to fall across the economy, economists are predicting a prolonged period of deflation stretching into 2011.
And following the steepest annual drop in prices since 1933, with the Consumer Price Index (CPI) data showing that prices in October fell by 6.6pc -- investors have been wondering what impact this will have on the economy.
"Many international clients have asked us if this deflation is pernicious," Davy chief economist Rossa White said. "We don't believe so."
Taoiseach Brian Cowen has argued that in a deflationary environment it would be justified to cut public wages to help stabilise the sky-high budget deficit, despite protests and a planned strike by workers against his plans.
But it seems that, in general, economists believe deflation could be helpful in restoring competitiveness to the former Celtic Tiger economy.
"If prices had increased by that amount, there would be loud calls for compensatory pay increases," Mr Cowen said after the latest CPI data.
"Equally, the fact that prices are falling must be taken into account when assessing the potential impact of wage and welfare adjustments."
Record
The consumer index fell by 0.2pc in October to stand 6.6pc lower than a year earlier, compared with a 6.5pc annualised fall in September, and marking a new record fall since 1933.
The median forecast of eight Dublin-based economists polled by Reuters had been for CPI to fall 0.1pc, giving an annual negative rate of inflation of 6.5pc.
"I certainly don't see an end to price deflation in 2010 but it's going to be at a steady pace and really what you're doing is eating into some pretty fat margins in the retail sector; there is still more to go there," said Davy's Rossa White.
The Harmonised Index of Consumer Prices, which is used for intra-EU comparisons, was down 0.2pc on the month to give a year-on-year fall of 2.8pc.
"We have a forecast for a return to positive inflation in 2011," said Deirdre Ryan, analyst at Goodbody Stockbrokers.
- PAT BOYLE
Irish Independent
