Friday 9 December 2016

Why deflation would be a disaster for this country if it took hold

Published 08/04/2014 | 02:30

It's expected that ECB President Mario Draghi will announce a reduction in the interest rate in June
It's expected that ECB President Mario Draghi will announce a reduction in the interest rate in June

Everyone remembers when the money they had bought them more stuff. I know I do. When I was a kid, two groats and a halfpenny would buy a Curly Wurly the size of your arm. Honestly, now look at the price, and the size of them.

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My faulty memory aside, inflation is a general rise in the price level, which erodes your ability to purchase goods and services with your cash. So if you had €10 and every apple was €1 yesterday, you could buy 10 of them. If the price goes up to €2 per apple, you can only buy five of them. Inflation hurts people on fixed incomes like the old and the poor, but it also makes Irish goods less competitive when they are exported abroad, and makes it harder for businesses to plan ahead effectively.

Crucially for Ireland, when interest rates are low, inflation is an implicit transfer from lenders to borrowers because the borrowers are paying back loans in 'cheaper' money.

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