Wages will suffer 'if prices fall any further'
Published 17/01/2014 | 02:30
FALLING prices could be a bigger threat to the economy than inflation, an economist has warned.
New Central Statistics Office figures show Irish prices were unchanged in December and rose by just 0.2pc in the year, the lowest annual inflation rate since 2010.
Economist Alan McQuaid of Merrion Stockbrokers said that "it looks like deflation rather than inflation is the bigger threat to the economy, and it is not just in Ireland".
Falling prices might be welcomed by consumers, but there was a risk that they could create a vicious circle where consumers put off buying things in the hope they would be cheaper in a few months, he said.
It could also lead to falling wages, which would dampen demand further.
And eurozone governments have less tools to deal with deflation than with inflation as they cannot not adjust interest rates to combat falling prices.
European interest rates were already at a record low of 0.25pc as eurozone inflation had recently hit a four-year-low of 0.7pc, increasing marginally to 0.8pc in December.
However Mr McQuaid said that recent industrial production figures from the US suggested the global economy looked likely to grow more than in 2013 which would avert the risk of deflation.
Alcohol, rents, restaurants, hotels and education were the areas that saw the biggest price rises in the last year, the Consumer Price Index for December shows.
However there were falls in the price of clothing, footwear, furniture, communications, transport and food.
A supermarket price war before Christmas may have contributed to notable falls in the price of fruit and vegetables, with potatoes down over 16pc in the year, while vegetable prices were down 4.2pc and fruit was down 3.1pc in the year.
Overall food prices were down 1.1pc in 2013, with the price of non-alcoholic drinks down 3.7pc, and soft drinks down 3.7pc.
Clothing and footwear prices fell by 4pc, furniture and household equipment prices were down 3.7pc and communications costs fell by 2.4pc thanks to lower phone costs.
Transport costs increased, mainly due to higher bus, rail and air fares as well as higher petrol and diesel prices.
Rents rose by 8.5pc, while electricity prices rose 2.3pc and gas prices were up 1.9pc.