Inflation in Ireland and the Euro area

In an earlier post I drew attention to the extent to which Ireland’s recent apparent competitive gains reflected the weakness of the euro relative to the dollar and sterling.

Another component of competitiveness is, of course, our rate of inflation relative to that of the Euro area as a whole.

It is therefore of interest to put on record the inflation rates in Ireland and in the Euro area since 1999.

This is facilitated by the European Central Bank’s website, from which monthly data on the rate of inflation as measured by the Harmonised Index of Consumer Prices (HICP) may be readily downloaded.

The following Chart tells the story.

It may be seen that for the first five years of the new monetary union Ireland’s inflation rate was – contrary to expectations – significantly higher than the Euro area average.  This resulted in a significant loss of competitiveness relative to the rest of the Euro area.

For the years between 2004 and 2007 our inflation rate behaved as expected in a monetary union and differed little from that of the Euro area average.

During 2009 and 2010 we experienced more deflation than the rest of the Euro area. This helped restore some of the competitiveness we had lost in the early years of membership and the ‘internal devaluation’ was hailed at the time in the belief that it would play a big role in getting the economy moving again.

Since 2010, however, our inflation rate has been climbing back up towards the Euro area average.

It would seem that any further ‘restoration of competitiveness’ will require further weakness of the euro on the foreign exchange markets.

7 thoughts on “Inflation in Ireland and the Euro area”

  1. Looking at the chart, it seems to me that the intense competition for survival, that was a response to the fall in consumer demand, was earlier and deeper in Ireland than anywhere. The European economy (consumption) recovered somewhat from the 2009 shock, but Ireland due to the debt burden has not been able to recover.

    But as austerity bites throughout Europe, the same intense price competition is manifesting itself. It should be remembered that in other European countries, there is probably much more of a profit reserve left, to enable some price reductions.
    In Ireland’s case this is not so, and many businesses would need a 10% price increase, in addition to volume increases, in order to survive.

  2. @All

    In relation to exchange rates, at we currently at an unusual point in the euro/ Punt/ sterling exchange rate mix.

    Are we now in almost exactly back to the sterling parity rate that last existed up to March 1979?

    1979 £IR = £Stg
    1999 £IR ~ .78 = Euro.
    2102 £Stg ~ .78 = Euro.

    Can one infer that, despite all the depreciations etc of the £IR punt and the entry into the euro, we are in fact back at a 1979 sterling parity exchange rate, when we try to compare our costs and competitiveness with the UK.

  3. That last year of course should have read 2012 not 2102. (The euro will hardly see 2102, whatever about £Stg or the £IR!)

  4. Brendan

    A useful post as ever. However I have never been terribly convinced that consumer prices are a terribly useful gauge of external competitiveness.

    Take the case of a foreign firm looking to locate either in Ireland or elsewhere or an indigenous firm looking to expand employment either at home or abroad. Clearly qualitative factors matter a lot and these are well understood (rule of law, infrastructure, quality of workforce, etc) otherwise a very-high-price economy such as Denmark would not have an export sector.

    When it comes to quantitative factors a firm will look primarily at labour costs as these account for the bulk of expenditure, not consumer prices which comprise a much smaller share of the cost base. I’m not sure how relevant the cost of college fees, the price of a pint, medical insurance, etc are for decisions about investment and firm location.

    I appreciate that conclusions based on labour cost-based measures of competitiveness are hazardous for Ireland. Still, it’s probably more relevant to note that average hourly wages remain essentially flat over the last two years rather than to worry about inflation converging toward the euro area average.

  5. @Examiner

    Hourly earnings and unit labour costs are obviously very relevant too. However, it is hard to get continuous data for earnings and we are all aware of the pitfalls in measuring productivity in Ireland.

  6. Brendan,

    Your conclusion – that further competitiveness gains can be achieved through devaluations of the euro – seems to imply either that the import component of value added in the export sector is low (this is not true – for Ireland it is very high) or that the export sector imports from the euro area.

    Again, this is not so. For one thing, oil is priced in dollars, so any further euro devaluations cause energy price rises which hurt Irish exports.

    In general, it would be much more useful for Ireland to focus on cost reductions which are within its domestic control. Perhaps the minimum wage – second highest in the EU, despite a 14.3% UE rate – could go down a euro or so?

  7. @Brendan et al

    Throughout Ireland there is an epidemic of cartels which are artificially increasing our cost base. Also many companies are abusing their position of dominance to evict smaller competitors from the market. They are doing this under the guise of a recession whereby small operators going bust is the norm. This all leads to higher prices and a significant loss in competitiveness.

    The Competition Authority has an abysmal record in regulating competition and like the Financial Regulator who failed to regulate the banks, the Competition Authority, by not doing its job, is having a detrimental impact on the Irish domestic economy.

    In 2004, Dr. John Fingleton as head of the Competition Authority stated that anticompetitive practices were costing the Irish economy circa €4 billion per annum which equates to approximately €2,400 per household. Now if each household in Ireland had an extra €2,400 to spend, it would certainly give the domestic economy the kick start it needs. Moreover, the reduction in the cost base would make Irish exports more competitive and increase Ireland’s attractiveness as a tourist destination.

    If one takes Dr. Fingleton’s figure as correct (personally I believe it to be greater), then the lack of competition regulation in the naughties alone has cost the Irish economy at least €40 billion, more than the Anglo bailout! I really think this deserves more research.

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