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How fast is Irish inflation falling?

The twelve-month CPI and HICP rose 1.1% and 1.3% to December, and these numbers were duly headlined. But both indices have been falling in recent months, and it beats me why people use 12-month numbers in the middle of a big macroeconomic correction. Karl Whelan made a similar point here recently in the context of the quarterly national accounts.

There are small but significant seasonals in the CPI and HICP. The CSO does not adjust, but the following is based on up-to-date factors (an Excel file with the data and factors is available from john.lawlor@dkm.ie). Unadjusted, HICP showed small monthly changes in Sept, Oct, Nov, then fell 0.73% in Dec. The adjusted pattern was similar, but the fall in December lower, at 0.46%.

For unadjusted CPI, Sept and Oct showed only small changes, but then big falls of 0.93 and 1.21 in Nov and Dec. The adjusted falls were again smaller at 0.84 and 1.09 (but these are still very large month-on-month numbers).

Thus for the last two months, and seasonally adjusted, the CPI has dropped almost 1% per month. The HICP has been falling only for a month, and more slowly. The difference between the two is mostly about mortgage interest (see my paper in ESRI QEC for September 2007), and I think the HICP is a better index. When I expressed this view in 2007, the CPI was rising faster than the HICP, and my argument was described as academic (ie wrong) by ‘certain parties’ keen on compensation for inflation. A change of horse by these parties is confidently predicted (difficult manoeuvre at speed unless you are a Cossack).

Recent forecasts of FY 2009 CPI inflation are minus 2% (ESRI) and minus 2.5% (Pat McArdle of Ulster Bank). These numbers look well within range, but HICP could show a smaller fall than CPI if mortgage interest rates continue to drop. Either way, we are a long way away from mid-September, when the pay deal was negotiated. At that time, inflation looked set in a band around plus 4%. 

There is a big shift in the price index seasonals from December to January – if the adjusted trend is zero, the unadjusted shows a significant drop. If anyone quotes the unadjusted drop next month, they incur four faults.

4 replies on “How fast is Irish inflation falling?”

Inflation is falling a lot faster than it appears! The 1 percent falls (s.a.) in November and December are NOT at annual rates. So at an annual rate, prices are dropping about 12 percent. In other words, if this pace of price declines continue over the remainder of this year, 12-month inflation will be -12 percent in November. How is that consistent with the ESRI’s -2 percent?

I do find it amusing when the media report that “prices fell in Janauary due to the sales” and stuff like that. It may be that the seasonal factors for December and January get messed up this time because the sales were brought forward.

In relation to the annual forecasts for 2009 (ESRI, Ulster Bank), surely it is unreasonable to compare such projections with the recent monthly declines due to the speed at which things can turn around over such a time frame?

If we had looked at monthly changes in inflation last summer when oil/commodity prices were rocketing we could just as easily suggested +12% annual rates and yet things have changed so rapidly in the months that followed as we are all well aware

I don’t think it makes any sense to annualise the figs for the last two months. Looking at the components, it is clear that energy was a factor – the price of oil cannot fall by another $100 per barrel. CPI (but not HICP) will benefit some more from falling interest rates, but there is a lower bound here too. Alan is right though that some sales were brought forward into December, but the effect will not be material – CPI December would have been priced about the 9th. or 10th., before this became widespread.

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