Inflation once again?

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.

12 thoughts on “Inflation once again?”

  1. @Brendan Walsh – “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 defence of the newspapers (though not an overly energetic defence)…

    …but even the first few paragraphs of this article in the IT today focus on the monthly and the fact that it’s creeping up (I admit it’s the only article I have read on deflation today):

    http://www.irishtimes.com/newspaper/finance/2010/0410/1224268049533.html

  2. Brendan – your patience with charts is appreciated. It’s also worth mentioning that there’s a seasonal in the month-on-month in February (and to a certain extent March) as prices recover after the January sales.

  3. “This is another illustration of the tendency of Irish economy commentary tends to focus unduly on annual changes”

    I think a bigger problem is that the media often/usually don’t know the difference between annualised changes, annual changes, year on year changes, seasonally adjusted changes, and monthly changes.

    Its common for the Irish Times and RTÉ to report things like ‘prices down 4% in February’ or something similar, when it is actually the year on year change that was -4% and not the monthly trend. They also get the trends wrong because they are looking at year on year trends rather than monthly trends.

    A major problem for the country is that economy reporters often don’t even know such basic statistics. The papers would rather hire people to write blog type ramblings than hire someone qualified to do a job. I partially blame the bad economic reporting over the past 10 years for our crisis. George Lee was about the only decent reporter in the daily media (of course there are good Sunday journalists and columnists, but they don’t have the same impact).

  4. Is this true inflation ?
    OK, CPI is increasing but not due to domestic demand or excess money in the economy.

  5. I wouldn’t be so quick to call an end to the period of deflation. If we exclude mortgage interest and energy products (with 14.4% CPI weighting) the rate of deflation is actually increasing, albeit only from -3.1% to -3.2%.

    If we look at the monthly changes and just exclude energy products (with 7.8% CPI weighting) the price change for the month was actually -0.06% instead of the +0.10% seen for the overall index.

    Of the 12 COICOP groups used in the index, six showed monthly price decreases, two were flat on the month, and only four showing monthly price increases.

  6. Asset deflation continues as does wage deflation. As devaluation picks up, other imported costs, mainly food and goods, will increase. In Austrian terms, as money is still disappearing, deflation is still present. Gioven the fiscal factor, expect the worth of the nation to continue to plummet, probably for two years.

    But prices going up or down do not constitute inflation or deflation. This is a banker trick. If “inflation” is 2% then theft of all money is 2% as the money created without value is of that order. Money may actually be of increasing value, despite the devaluation, depending upon the purpose of the capital to be deployed.

    Very broad terms, can be picked at, but this is a contrast from the conventional story.

    Change lifestyles now as this is not getting better any time soon.

  7. The retail price deflator implicit in the retail sales index also suggests an end to falling prices around the turn of the year. However I suppose its relative to our trading partners is what is important. The trade weighted prices implicit in the central banks harmonised competitiveness indicator shows that, holding currency steady (admittedly no good reason to do that!), Irish realative prices are back to late 2000 compared to our main trading partners. Of more concrete value is that irish prices relative to eurozone are at levels last seen in 2001.

  8. What’s Inflation by the way? Price increases or, as I understand the term, an increase in the money (cash + credit) supply. Deflation is the destruction of money – that is, paying down debt.

    Price changes are not inflation/deflation – they are changes in the costs of raw material inputs and energy used in the production process. These input costs may well be influenced by money supply – but there is the demand/scarcity factor also. Clearly distinguish ‘money’ from commodities – they are different and should be reported in such a manner that you could distinguish between the two and perhaps get a fix on how one is affecting the other.

    If you would like more clarity in MSM writing about matters of economic import, then clarify what your terms of reference are.

    Also, you might like to get the commentators to distinguish between Real Wealth and Virtual Wealth – these are definitely different!

    B Peter

  9. @ Ronnie O’Toole

    I agree prices relative other countries is what is important.

    One problem though (that is not reported in the HICP), is that over the past 5 years many people have locked into high housing costs by taking out mortgages.

  10. The difficulty with monthly figures is that the changes are so small that it is difficult to take them seriously given the approximations that are inevitably involved in calculating the CPI. The same applies even more to quarterly estimates of GDP/GNP given the size of subsequent revisions.

  11. Since the CPI is formed using weights from the Household Budget Survey, these are not updated every year and so are likely to now reflect pre-bust expenditure patterns. [I’m not sure what weights are used to form the COICOP indices but suspect something similar applies there also]. This may represent a serious bias when looking at inflation/deflation rate now?

    For example. mortgage interest payments etc. may be relatively more important in borrowers baskets than they had been previously. Related to this, the CPI is an average for all individuals represented. Is there a case for the CSO to routinely produce indices for sub groups (in addition to regions), [even if the HBS sample is not fully representative for this purpose]. Does anyone know of work that calculates inflation rates for borrowers or work that makes an attempt to update expenditure weights [even in an ad hoc manner] to reflect the changes in aggregate expenditure behaviour?

  12. @Tony
    We were involved in a Household Budget Survey last September. If they are using that one then it should be pretty up to date. The reality is we all have our own personal inflation/deflation rate. The CPI is at least a decent indicator of trends.

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