The June Inflation Figures

Price index numbers for June were published last Thursday. There are consistent seasonals in the Irish numbers, although CSO does not adjust, presumably because the seasonals are small, ranging only from 98.9 to 100.6 for the HICP. But the seasonals are big enough to affect month-to-month comparisons when inflation is around zero, and it is better to adjust. This note uses the 2008 seasonals computed on the data run up to Dec 08 by John Lawlor of DKM mentioned here in an earlier posting.

Seasonal effects are small through most of the year but bigger over year’s end. No statistically significant nit should be left unpicked.

Both HICP and CPI sa fell again in June. HICP has fallen for seven straight months, CPI for eight. The last twelve sa HICP and CPI numbers are, in mom % changes,

sa % Chg   HICP     CPI

Jul 08       +0.1     +0.1    

Aug 08     -0.2     +0.2   

Sep 08     +0.2     +0.2

Oct 08       0.0     +0.1

Nov 08       0.0     -0.8

Dec 08     -0.5      -1.1

Jan 09       0.0      -0.9

Feb 09     -0.6      -1.1

Mar 09     -0.4      -0.3

Apr 09     -0.1       -1.0 

May 09    -0.6       -0.7

Jun 09    -0.1        -0.3 

The HICP peaked in July 08, since which point it is down 2.2% sa. The CPI peaked in October last, and has fallen 6% sa from that point. The HICP is a subset of CPI – about 9.5% of CPI by weight is excluded from HICP, and 6.7% of this is mortgage interest. So the difference between the two is almost entirely mortgage interest.

I have argued elsewhere that mortgage interest (the price of credit, not of a good or service) does not belong in a general index of consumer prices, and I prefer HICP, which has recently been falling more slowly. It was the other way round a couple of years back, when interest rates were rising. There will be another switchback when the ECB gets round to raising rates again. (Don’t ask!).

The June Euro-area figs will be out in the next few days. I expect that they will show that Irish HICP inflation over the last twelve months has run about 2% below the Eurozone average. This is not much of a real-exchange-rate adjustment and it is fair to ask whether it has further to run.

The Govt increased Social Welfare rates of payment by a little over 3% in the October budget, with the increases effective from January 09. Jobseekers’ Allowance, for example, rose 3.3%.

In the October budget documentation, Finance stated that they expected HICP inflation, year 09 versus year 08, to be about +2.2%. At this stage, it looks as if the actual fig could be more like -2.2%, and the real value of the main payment rates (using HICP) is about 5% ahead of where it was last Summer.  

CSO have set up a committee to review price index numbers and it is to advise the DG of CSO before year’s end. I prefer HICP to CPI, and the UK, whose RPI has the same mortgage interest problem as our CPI, has begun to place more stress on the HICP. There are of course other options. If you have any views on the best way to measure consumer prices, this is a good time to let CSO know.

8 thoughts on “The June Inflation Figures”

  1. The figures are tending to confirm what I posted here quite a few times. Namely, its a media myth that the fall in Sterling v the Euro is bad for Ireland’s retail price competitiveness, and vice-versa. Obviously it is in the short-term, but not long-term.

    My contrary view is based on the fact that, because so much of what is retailed here comes from the UK (whether manufactured there or supplied from there, having been first imported to the UK from Asia), retail prices in Ireland are very heavily influenced by movements in Sterling v the Euro.

    When Sterling rises v the Euro (e.g. in the late 90s), there is a temporary improvement in Ireland’s retail price competitiveness. But, within a year this starts to translate into higher retail prices in Ireland, the temporary advantage relative to the UK is eroded and eventually lost completely, and we end up with a significant deterioration in retail price competitiveness v the Eurozone.

    When Sterling falls v the Euro (e.g. since 2006), the reverse happens. To begin with, there is a temporary disimprovement in Ireland’s retail price competitiveness, and shopping trips to Newry soar. But, within a year this starts to translates into lower retail prices in Ireland, the temporary disadvantage relative to the UK is eroded and eventually goes completely, and we end up with a significant improvement in retail price competitiveness v the Eurozone. Its clear that this is now happening.

    It is no coincidence that, in the aftermath of the fall in the value of Sterling v the Euro, which most media reports portray as disastrous for Ireland’s price competitiveness, according to this week’s Mercer report, Dublin is actually plunging down the list of most expensive cities in Europe. I have done a quick calculation of price changes for important retail items in Ireland and the Eurozone between January 2006 (when Sterling was at a high v the Euro) and May 2009. The figures are from Eurostat and are quite striking:

    alcohol: Ireland +2.9%, Eurozone +8.7%
    clothing: Ireland -3.9% , Eurozone +12.1%
    footwear: -6.2% , Eurozone +13.0%
    furniture: Ireland -4.1% , Eurozone +6.5%
    carpets: Ireland -17.0% , Eurozone +6.2%
    motor cars: Ireland -4.4% , Eurozone +1.5%
    audio-visual: Ireland -32.9% , Eurozone -27.6%
    games, toys: Ireland -22.7% , Eurozone -1.6%
    jewellry, watches: Ireland +13.8% , +30.7%

    What’s clearly beginning to happen is that the improvement in UK retail price competitiveness v the Eurozone countries, resulting from the fall in Sterling v the Euro since 2006/07, is bringing about a similar improvement in Ireland, although obviously here the process takes a couple of years to work through the system after the currency movement, whereas in the UK it happens almost at the same time as the currency movement.

    While the process works it way through the system, there is, of course, a disimprovement in Ireland’s retail price competitiveness v the UK. However, its clear that even this is now being heavily eroded as the gap between Ireland’s inflation rate and the UK’s inflation rate widens. Since 2007 goods price inflation in Ireland has been about 8% less than in the UK, which erodes close to half the disimprovement in Ireland’s retail price competitiveness v the UK resulting from the fall in Sterling. And, there is much more to come. If the exchange rate is the same in January 2010 as now, I predict there will be a lot fewer shoppers in Newry next New Year sales than last New Year sales. Not only will the Euro be at around 85p rather than the 95p it was last January, but goods price inflation south of the border will be around 8% to 10% less than north of the border (the more so when the UK restores its VAT cut on 1st January 2010).

    I should point out that the above analysis applies mainly to goods traded and sold in retail outlets. The process takes much longer to work through the system in the case of services, particularily those from monopoly suppliers.

  2. Colm:
    Deflation is a slow and painful way to accomplish a real depreciation.
    With inflation somewhere between -2% and -6%, real interest rates are somewhere between +4% to +8%. Not exactly what the doctor ordered as a cure for the Great Recession.

  3. I struggle to believe these days that the constituents of a general index of consumer prices reflects the reality of day-to-day living and maybe it would be better to use some real life examples of several examples of people/families (actual consumers) to really get a finger on the pulse of it. For example, in the past few months I have only noticed that (in the real world) I’m paying more for almost everything. Just off the top of my head I have found the following to have increased on me as I’ve paid/renewed them since April – car insurance, car tax, house and contents insurance, Vivas, haircut in my local barber (+20% !), petrol, NCT, many food items (though Tesco have brought some down too), artists materials, magazine subscriptions, sports events tickets, plants and seeds, holiday to same place as last year, new schoolbooks, … I could go on and on but I won’t. My cost of living hasn’t deflated at all so I find figures like this a bit meaningless these days. On the bright side, the white wine I drink seems to have gone down 50c!

  4. To paraphrase Winston Churchill, the Euro is the worst monetary system for Ireland, except for all the others. It creates new stresses and strains including the need to painfully deflate rather than lazily devalue.

  5. John

    Your analysis is interesting. The fact that a drop in the value of sterling may help to make Ireland more competitive makes sense the way you put it.

    I think however that quoting fugures since 2006 to back up your analysis is like painting a bulls-eye on your back. 2006 was the peak of the most outrageous bubble this country and perhaps the world has ever known. Ireland had become ridiculously expensive compared to other EU countries. The sterling:euro rate can hardly have said to have been the main cause of those price increases.

    A longer period or a non-bubble period might give more insight. With that said, your logic is persuasive if your analysis of the proportion imports made up of UK goods is correct.

  6. @John
    We don’t always agree but there is no doubt the differential between shopping North and South has narrowed considerably.

    Our grocery shop in our local Dunnes Stores has tumbled and there are some great deals out there. Interesting that it is happening as Sterling has strengthened. Supermarkets in particular should be able to react fairly quickly to changing currency given their high stock turnover. Depends how much forward cover they take on their currency requirements.

    I have never lived in a period of deflation before so this is a first for me. A friend of mine was high up in an electrical chain when the price of DVD players etc was tumbling. He said it was nigh on impossible to make money as turnover fell but costs (payroll, rents, light, heat, insurance etc) did not. This was an extreme example of deflation in a particular sector. We do need to see the service costs come down also.

Comments are closed.