Inflation Once Again (Not)

The papers report nsa, as usual, CPI and HICP numbers for August, released yesterday by CSO. There is a non-trivial seasonal for August against July, and the sa change in the CPI is + 0.2, due mainly to mortgage costs, below the nsa +0.4 reported in the prints. The HICP, which excludes mortgage costs and is, I believe, a better index, was unchanged on the month.

14 replies on “Inflation Once Again (Not)”

I would agree that the harmonised index is a better indicator.

The CPI index may just be a blip, but we will not know for definate for another few months.

Mortgage interest has had the most influence on the CPI over recent quarters, accounting for almost 75% of the overall drop.

There is speculation that many financial institutions are holding back on increasing mortgage rates until Nama is in place.

If that proves to be the case, and increases follow, then the CPI is likely to resume an upward trend.

@Michael Harvey “There is speculation that many financial institutions are holding back on increasing mortgage rates until Nama is in place.”.

People I’ve been speaking to about this seem to think it’s a bit more concrete than just speculation. Plus there’s a lot of talk of them shedding a load of jobs once they believe they have everything they are going to get out of the government and are no longer ‘beholden’.

As I keep saying to people, if you are a bank worker at the moment, the nightmare scenario must be: get made redundant – ex-employer whacks up repayment on your mortgage and makes life a bigger misery – ex-employer eventually repossesses home, sells it for next to nothing and then takes you to court for the balance

…. then you end up in jail for not being able to pay (I think the way that works in Ireland is the court orders you to pay, then when you can’t, you get jailed for contempt of court).

@ Joseph

i seriously doubt any honest inability to repay debt will lead to jail time for anyone in the country. Is there even any examples of residential mortgages leading to jail time for anyone in the country yet? There’s a difference between not being willing to pay and not be able to pay.

@ Colm McCarthy

No only do the media ingore seasonal adjustments, they also indulge in headlines such as “Spectre of inflation returns after year of falling prices”
(from to-day’s Indo).

This gets my nomination for the most misleading headline on this topic.

There is nearly always a fall in prices in July and a rise in August because of July sales. Its the same in January and February. The best way to analyse the figures is probably to take July and August together. On this basis, it is difficult to say if inflation is returning. I hope it is. Deflation is bad. The sooner we are out of deflation, the better. But, it may be many months before the HICP y-o-y inflation rate is positive.

However, inflation is definitely allready returning to the rest of the EU. The Eurozone y-o-y inflation rate went from -0.7% in July to -0.2% in August. In Germany, it went from -0.5% to 0.0%. In nearly all non-Eurozone countries in the EU, y-o-y inflation rates are allready strongly positive. The best situation for Ireland is positive inflation, but at a lower rate than in the rest of the EU. There is a good chance of this occurring early next year.

Of particular interest to Ireland is the UK inflation rate. I predict that this will surge in coming months. The HICP y-o-y inflation rate there was allready +1.8% in July, compared with -2.6% in Ireland, a gap of 4.4%. However, the UK figure is artificially low because they temporarily reduced VAT from 17.5% to 15.0% last December. If it wasn’t for that, the UK HICP y-o-y inflation rate would have been +3.1% in July, or 5.7% higher than in Ireland. However, the UK is planning to reverse that VAT cut on 1st January 2010. I predict that the UK y-o-y inflation rate will by then be in the range 4% to 5%, and the gap between that and Ireland’s y-o-y inflation rate could be in the range 6% to 7%. By early 2010, about two-thirds of the relative increase in retail goods prices in Ireland, resulting from the fall in the value of sterling, will have been clawed back through lower inflation here. And, on this basis, its likely that shopping trips to Newry will be well down in early 2010 compared with early 2009, unless Lenihan foolishly increases expenditure taxes in his next budget.


The best situation for Ireland is positive inflation, but at a lower rate than in the rest of the EU. There is a good chance of this occurring early next year.

Do you really think so?

If there are any signs of inflation becoming a problem in either France or Germany, the ECB will almost certainly raise the benchmark rate. Not so good for Ireland.

Falling prices…. whats not to like….

I know the economists theories but can we not just enjoy this for as long as possible…. A pint back to 3 Euro. Good God no, that would be a national disaster…..

Were going to get screwed over one way or the other…. but wouldn’t it be ok if there was inflation in the rest of the EU and deflation here for a while?

And a good bit of inflation in the UK, seeing as they are printing money like bejasus…. were just taking on debt like bejasus… D’Oh!!!

@ Garry

enjoyed one of those 3 euro pints last night after work. Was a lot of reminiscing going on i tells ya. Reckon it’s been a good 10 years since they were available at that price.

More seriously, isn’t there an argument to be made that with our massive debt burden, isn’t inflating our way out of debt, on a cross-Eurozone basis, the only way out of our current mess?

@Michael Harvey

Given that the ECB raised interest rates in July 2008, now universally regarded as an act of complete madness, I would be reluctant to try and predict what they will do in any given situation. However, I don’t see why they should raise interest rates much if inflation is positive but low (say in the range 1.5% to 2%). And my comment referred to ‘rest of EU’, rather than just the Eurozone. So, for example, if inflation in Ireland was positive but much lower than in the UK in early 2010, which is likely, that is the ideal combination for Ireland, and that wouldn’t trigger ECB interest rate rises as the UK isn’t in it. The ideal combination for Ireland next year would be something like: inflation in Ireland: +1.0%, in Eurozone: +2.0%, in UK: +5%. I’ve no idea if that will happen, but there is a reasonable chance that it will.

But, inflation isn’t the only thing they should be taking into account by the ECB. The fact is that the Euro is far too high and manufacturing output and exports in the Eurozone have collapsed, down 20% to 30% on 2008. This is partly because of the strong Euro. Ireland is the only Eurozone country where they have held up. Manufacturing output in most Eurozone countries in 2009 (apart from Ireland and Austria) is back to its 1995 level. This is disastrous.


So you’re not disagreeing about the interest rate rises and job losses then? But you’re right, jailing people for being unemployed and not being able to pay their mortgage would be a step too far.

As for inflation – I thought last week that the G20 would ‘keep stimulus packages in place’ because there’s still a lot of fear out ther and have to wonder what impact that’s going to have on inflation in other countries next year and subsequent knock-on to interest rates. Will we (in Ireland) see deflation (not sure) and rising interest rates (yes) and rising Euro (possibly) and rising debt (yes) next year? Only time will tell.

As for beer at €3 a pint. Come over to the dark side – it’s only €2 here.

Apologies for side tracking the thread but this news item makes interesting reading…….

Taiwan’s former President Chen Shui-bian has been sentenced to life in prison after being found guilty of corruption by a court in Taipei.

Mr Chen was charged with embezzlement, taking bribes and money laundering, involving a total of $15m (£9m) while in office from 2000-2008.

Do we need a new constitution or political courage?

No enquiry…no tribunal, just a thorough and fairly quick investigation.

His wife was also sentenced to life.

@ Joseph

we’re gonna see the ‘Irish’ banks raise their interest rates next year for sure, probably by up to 0.5% (before any official ECB), maybe even by 1.0% (due to ECB liquidity withdrawal). The foreign banks probably don’t need to as much, as they didn’t pass on all the cuts on the way down anyway, and are already offering very expensive fixed rates as it is (this is to do with their core free funding i’d imagine). Job losses are more difficult to predict, but natural wastage is going to be a long term feature anyway, i’d say it’ll be years before you see the banks going back to external hiring at a general level.

Deflation or very very low levels of inflation seem the most likely result of the Irish asset price collapse. Do you know anyone even remotely contemplating buying a mid range new car these days? I dont.

Interest Rates are only one part of what cso use to calculate the mortgage costs in CPI – the other part is the size of the mortgage. The size of new mortgages is unlikely to stop falling anytime soon – has anyone explored in detail what this might means for CPI?
Presumably it is a slow moving average but that (all other things…) would represent a slow deflationary drag for soon time to come.

ColmM: there is an article in the ESRI’s Quarterly Commentary for September 2007 which deals with these issues, downloadable from ESRI’s website.

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