Since the second half of 2008 this country has experienced the first sustained period of deflation in over sixty years. In 2009 the Consumer Price Index (CPI) fell by 4.5 per cent relative to 2008. Not since 1946 had the annual rate of inflation been negative. The record for deflation was in 1931, when the CPI fell by 6.4 per cent.
The accompanying Charts show the behaviour of the CPI and the Harmonised Index of Consumer Prices (HICP) over the past four years. (Am I only the only one to have the patience to enter Charts on this Blog?)
The CPI peaked in September 2008 at 108.4. By January 2010 it had fallen to 100.0, a cumulative fall of 7.7 per cent. The rate of deflation reached a maximum in January 2009, when a month-on-month decrease of 1.7 per cent was recorded. The HICP is less influenced by changes in interest rates, but it followed much the same pattern as the CPI, although varying within a narrower range. The month-on-month HICP deflation rate never exceeded 0.8 per cent, recorded in January and July 2009. It peaked at 110.0 in June 2008 and by January 2010 had fallen to 105.0, a cumulative fall of 4.3 per cent.
The rate of CPI deflation has tended to fall since early 2009 and the HICP since a few months later. By February and March of this year both were showing positive, if very low, rates of inflation (and seasonal patterns are in play). This reversal received little attention because most commentaries on the monthly CSO releases headline the year-on-year changes. Thus even as the monthly rate returned to positive territory in February 2010, the newspapers continued to discuss annual deflation rates in excess of 3 per cent.
In its latest Quarterly Bulletin (released last week), the Central Bank forecasts annual inflation rates for 2010 of -1.3 (CPI) and -1.1 (HICP). These are year-on-year forecasts and therefore reflect substantial carryover from the record deflation of 2009. If the CPI continued to edge up by 0.1 per cent a month from March to December 2010 – not implausible given that interest rates are on their way up, the euro is falling and oil prices rising – the annual rate of inflation for 2010 would be -1.3 per cent – exactly what the Central Bank forecasts. But by December the price level would be 1.4 per cent higher than it was in January.
This is another illustration of the tendency of Irish economy commentary tends to focus unduly on annual changes, to the neglect of significant indications from quarterly or monthly data, a phenomenon to which Rossa White drew attention in an Irish Times article last week.