Inflation falling through the floor.

mike65

Biggest monthly fall since records began here as the annualised rate falls from 4 to 2.5%, this is for October so by end of year it should be 1.5% (?) as continuing falls in fuel and the ECB rate cut hit.

Économiste Monétaire

Here is the link to the CSO CPI release that mike is talking about:

http://www.cso.ie/releasespublications/documents/prices/current/cpi.pdf

gurramok

Deflation on the way here for '09?

Is this the hard way for Ireland to be competitive again?

silverharp

gurramok wrote: »

Deflation on the way here for '09?

Is this the hard way for Ireland to be competitive again?

What I would like too see it the gov. put a gun to is own head and force paycuts in the public sector, there are numerous groups that are way overpaid compared to other parts of Europe. In the 70's they could break these agreements though inflation and devaluations, it will not be possible this time. if they dont then the public sector (including ESB and the rest) will be like a dead anchor on the economy.

cavedave

Deflation on the way here for '09?

Is this the hard way for Ireland to be competitive again?

Why is deflation so bad?

Because it delays spending? Well necessities like food you have to buy anyway. Most of our consumer goods have been deflating anyway. Computers TV's Chinese made goods etc have been going down in price for ages.
House prices going down? they are probably too expensive at the moment.

Would deflation be terrible?

Économiste Monétaire

cavedave wrote: »

Why is deflation so bad?

Because it delays spending? Well necessities like food you have to buy anyway. Most of our consumer goods have been deflating anyway. Computers TV's Chinese made goods etc have been going down in price for ages.
House prices going down? they are probably too expensive at the moment.

Would deflation be terrible?

It's not so much that short term deflation is bad. The problem occurs when you get into a deflationary spiral, it's quite difficult to get out of, e.g. Japan.

In fairness, we are the 4th most expensive country in the world to live in.

Some deflation is not a bad a thing at this stage in the short term.

What annoys me is that recently rising inflation was this big mega evil (its a technical term) that we were facing.. Now deflation is the big mega evil...

johnnyskeleton

gurramok wrote: »

Deflation on the way here for '09?

Is this the hard way for Ireland to be competitive again?

I'm beginning to think that deflation will be a disaster for Ireland. Commercial rents and rates are higher as a response to the higher price of consumer goods during the boom. If commercial rents and rates are relaxed then consumer goods can safely deflate to parity with other countries. But I don't think that Irish landlords and local authorities have any intention of reducing rents & rates, and as such irish businesses will reach breaking point before irish prices will be internationally competitive. For example, if a pair of jeans is €20 in France and €35 here, the Irish company cannot make a profit if they drop the price of jeans below say €25/30 because of their high costs. So applied across the board, I think domestic consumption & the retail industry could be destroyed before prices could drop to competitive levels.

The result of deflation I fear is that we will all have more savings but no goods to spend it on, and a reduced quality of life.

johnnyskeleton

mike65 wrote: »

Biggest monthly fall since records began here as the annualised rate falls from 4 to 2.5%, this is for October so by end of year it should be 1.5% (?) as continuing falls in fuel and the ECB rate cut hit.

The YoY rate falls to 2.5%. A MoM inflation of -0.9%, when annualised is -10.8%. So if prices keep dropping at the rate they did in November, we will see massive deflation.

johnnyskeleton

Deleted User wrote: »

What annoys me is that recently rising inflation was this big mega evil (its a technical term) that we were facing.. Now deflation is the big mega evil...

Stability is the goal.

johnnyskeleton

johnnyskeleton wrote: »

Stability is the goal.

You can't get stability when on a bubble path.

machintoshlover

If deflation means falling prices then in effect our money is worth more. As well as concerns about price stability if we do enter conditions of spiralling then wont deflation adversely affect the levels of debt in our economy?

Jim O'Leary has a good article that is somewhat related to this:

http://www.irishtimes.com/newspaper/finance/2008/1212/1228864709873.html

machintoshlover

machintoshlover wrote: »

If deflation means falling prices then in effect our money is worth more. As well as concerns about price stability if we do enter conditions of spiralling then wont deflation adversely affect the levels of debt in our economy?

Well inflation erodes the value of debt, as the money you are playing back is worth less then the money you recieved.

This works in reverse, as then the money you are paying back is worth more then the money you recieved. However, prices and wages in this country are too high. It makes us uncompetitive and given that we can't rely on another housing bubble to shore up the economy in the near term, then increasing our level of competitiveness would seem like a plausible and positive alternative. Short term deflation shouldn't be a bad thing for this country.

machintoshlover

True but when inflation increases don't Central banks raise interest rates which would eventually increase the cost of borrowing? - which would somewhat offset this. If there are spiralling levels of deflation the ECB cant lower interest rates beyond -0%. I think we are talking on two different levels Im looking at long term and your looking at the short term. I agree with what you say about Ireland being uncompetitive and that short term deflation can help this - but what are the risks and possibilites of deflation getting out of hand?

silverharp

Deleted User wrote: »

Well inflation erodes the value of debt, as the money you are playing back is worth less then the money you recieved.

This works in reverse, as then the money you are paying back is worth more then the money you recieved. However, prices and wages in this country are too high. It makes us uncompetitive and given that we can't rely on another housing bubble to shore up the economy in the near term, then increasing our level of competitiveness would seem like a plausible and positive alternative. Short term deflation shouldn't be a bad thing for this country.

I was talking to one of my neighbours yesterday, lets just say he is one of the "wheelers and dealers" around town, next on the scene arrives a building contractor who is doing some work on the road. Anyhoo , we are chit chatting about the economy and a couple of points , alot of "wealthy" people are in serious trouble , people who borrowed to get into retail and commercial property , contractors trading off credit cards and now are doing 0 business. On the plus side these two at least realise how bad things are , they do not expect the gov. to solve it. They get it in that they know prices have to fall and people need to pay down debt, any blowhard spouting for gov. to intervene in everything that is going on has to be representing a "protected" group. So I am optimistic that people "get it" , it will be interesting to see if gov policies going forward promote competiveness in the economy or not

machintoshlover

machintoshlover wrote: »

True but when inflation increases don't Central banks raise interest rates which would eventually increase the cost of borrowing? - which would somewhat offset this. If there are spiralling levels of deflation the ECB cant lower interest rates beyond -0%. I think we are talking on two different levels Im looking at long term and your looking at the short term. I agree with what you say about Ireland being uncompetitive and that short term deflation can help this - but what are the risks and possibilites of deflation getting out of hand?

as compared to high inflation and stagnation...?

machintoshlover

If we are experiencing falling price levels due to a drop in real aggregate demand then the small question of monitoring these falling price levels surely needs attention - because the effects of falling prices getting out of hand can be drastic. Thats all I'm saying.

silverharp

machintoshlover wrote: »

If we are experiencing falling price levels due to a drop in real aggregate demand then the small question of monitoring these falling price levels surely needs attention - because the effects of falling prices getting out of hand can be drastic. Thats all I'm saying.

once you understand its monitoring in the sense of watching a lava flow heading towards you

Économiste Monétaire

machintoshlover wrote: »

If we are experiencing falling price levels due to a drop in real aggregate demand then the small question of monitoring these falling price levels surely needs attention - because the effects of falling prices getting out of hand can be drastic. Thats all I'm saying.

Of course we need to monitor falling prices, just like we need to monitor rising prices. I don't think zaraba is arguing in favour of a deflationary spiral; more a natural correction to a lower cost base which is good for us in the long-term. As you said, aggregate demand has fallen and with a relatively short term deflationary period (and not too severe), nominal wages should correct down in line with prices in a reinforcing process (you can argue how long that will take, or if it will occur to any meaningful extent). I find that even mentioning the term deflation to someone has a sense of taboo about it. If we do fall into a deflationary spiral then the situation will most aptly be described by certain four letter adjectives that boards censors

Quantitative easing won't be an option if we're a pariah on the deflationary spiral front for the eurozone. There is no known solution--imagine the complaining people are doing now, then magnify that in a deflationary spiral with government (effectively) helpless.

cooperla

johnnyskeleton wrote: »

I'm beginning to think that deflation will be a disaster for Ireland. Commercial rents and rates are higher as a response to the higher price of consumer goods during the boom. If commercial rents and rates are relaxed then consumer goods can safely deflate to parity with other countries. But I don't think that Irish landlords and local authorities have any intention of reducing rents & rates, and as such irish businesses will reach breaking point before irish prices will be internationally competitive. For example, if a pair of jeans is €20 in France and €35 here, the Irish company cannot make a profit if they drop the price of jeans below say €25/30 because of their high costs. So applied across the board, I think domestic consumption & the retail industry could be destroyed before prices could drop to competitive levels.

The result of deflation I fear is that we will all have more savings but no goods to spend it on, and a reduced quality of life.

I would think that commercial rates will have to come down, which is a good think IMO. Some businesses will undoubtedly go out of business. As the number of empty commercial properties rise this should put pressure on the folks trying to rent out these sites to reduce rates to a level the market is willing to pay for. I'd also expect businesses bringing this up with their landlords when it comes to renewal time.

johnnyskeleton

Deleted User wrote: »

You can't get stability when on a bubble path.

Which is why you should try to identify bubbles in early course and prevent them from happening.

johnnyskeleton

cooperla wrote: »

I would think that commercial rates will have to come down, which is a good think IMO. Some businesses will undoubtedly go out of business. As the number of empty commercial properties rise this should put pressure on the folks trying to rent out these sites to reduce rates to a level the market is willing to pay for. I'd also expect businesses bringing this up with their landlords when it comes to renewal time.

I'd agree, but my point is that I think profits will fall much faster than rents & rates. Retailers are being hit badly at the moment, and I'm sure a lot would drop their prices if they could still turn a profit on those reduced prices but they cant because of massive costs. It would be great if rents would fall at the same time as profits (i.e. the same on the way down as on the way up) but I get the impression that a lot of landlords are holding firm on their rents. Equally with rates, the hard pressed local authorities have no other way of getting income and besides, local government is a very slow process.

I would expect that rents & rates (& also basic pay levels) to fall to where they need to be now in about 2 years. By which time, I think it might be too late for many businesses.

This is why I think that we as a country and our government are acting in the exact opposite way to how we should. House prices, rents etc should come down to reflect reality, but vendors and landlords hold out for some mythical recovery. Taxes should be reduced to help businesses and consumers, but they are being raised (i realise the government simply can't afford to raise taxes at the moment, my point is rather we should have been saving up money during the boom to allow us to have a stimulus package now).