AS Macro Key Term: Relative deflation

The term “relative deflation” is generally used to describe an economy with an inflation rate, which has not necessarily descended into negative territory, but is markedly lower than comparable economies. Over time, a low relative rate of inflation can lead to an improvement in price competitiveness in international markets, assuming that there has not been a compensating change in the exchange rate between two countries.

In our data example shown below we track consumer price inflation in Ireland, Spain and Germany. For most of the period shown, the annual rate of inflation in Germany was substantially lower than two of her partners in the European single currency area - this is an example of relative deflation.

Data from Timetric.

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The economy, Europe, US and Japan from Timetric

In 2009 and 2010 Ireland has experienced two years of absolute consumer price deflation - where the rate of inflation becomes negative.