Monday 9 December 2019

Scope for further price cuts as education and health jump

Fuel prices are dropping
Fuel prices are dropping

Thomas Molloy

Are we already in a deflationary spiral and is it a bad thing?

Prices have been falling for several months, so we are definitely experiencing a form of deflation these days, even if prices are (just about) higher than they were this time last year.

Most economists and almost all retailers hate deflation because it does very strange things to the economy.

Shoppers hold off buying expensive goods because they will be cheaper in a few months' time.

While deflation is rare, we experienced it in the housing market recently as buyers stopped buying.

The deflation we see at present in other sectors can be chalked down to a few factors, but the main reason is tumbling energy prices.

It is difficult to get too upset by falling oil prices, which will help reduce the cost of almost every product sold in the State.

The reality is that the deflation we see at present is fairly benign, even for those in the energy business; few people are going to stop driving to work or heating their house because it would be cheaper to do the same thing next month.

The deflation witnessed in many European countries right now, and the spectre of deflation in the bigger eurozone economies, is the chief reason why the European Central Bank has pushed borrowing costs to zero for most banks and may begin printing money in the new year.

That too is good news for many homeowners with mortgages. The impact of ECB rate cuts was to push mortgage repayments down by almost 11pc.

There is scope elsewhere in the economy for further deflation that would also appear benign to most citizens. The biggest drivers of price increases in the past decade have been sky-rocketing legal, education and health costs.

Education continues to rise stubbornly. Yesterday's figures show the cost of education jumped 20 times faster than average prices. A little deflation here would be no harm either, but we must be careful; too much deflation is a dangerous thing.

Irish Independent

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