Ireland in the grip of deflation

The debt ridden Irish economy is plunging into a period of price deflation according to new figures on consumer prices. The Irish economy is more exposed to the dangers of inflation than most because the private sector of the economy has a level of outstanding debt equivalent to around 175 per cent of GDP. The big risk is that a persistent downturn will bring about reductions in wages and prices and increase the real value of unpaid debts.

The hope is that falling consumer prices and cheaper mortgage costs will provide a boost to disposable incomes and persuade consumers to spend a little more providing a stimulus to demand. But with the consumer price index now falling (i.e. negative inflation) the real rate of return on saving is positive and will probably lead to a rise in private sector saving and cash hoarding.

The financial bubble that drove much of Irish economic growth over recent years has come spectacularly to an end. Ireland is deep in recession and unemployment is likely to reach 14 per cent of the labour force by the end of 2009. With the fiscal deficit continuing to rise, Irish Prime Minister Brian Cowen’s government has brought in a series of emergency budgets and fiscal belt-tightening packages.