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.

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.

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.