Friday, September 13, 2013

Inflation approaches zero

Yesterday’s CPI release for August from the CSO shows that general inflation over the past 12 months has been very low.  The following chart has the 12-month changes in the overall CPI and in a ‘core’ measure of inflation (the 85% of the index excluding mortgage interest and energy products).

Core Inflation

Core inflation is running slightly higher than the overall inflation rate as both mortgage interest (-5.9%) and energy products (-0.7%) showed price declines over the year.

The core deflation that was seen for two years up to the start of 2011 and the relatively low level of inflation since then has resulted in a substantial narrowing in price differences between Ireland and other countries. 

Here is the Harmonised Index of Consumer Prices (HICP) for Ireland the EA17 since 2002. [The chart says nothing about relative price levels as both indices are set to 100 in January 2002; it merely allows differences in relative price changes to be seen.]


Here is a similar HICP chart for Ireland and the UK showing that the relative gap over the last four years or so has been even greater.


Eurostat does provide some comparative price level data.  The following chart shows comparative prices for HFCE (household final consumption expenditure) for the UK and the EZ17 relative to Ireland (=100) for the past decade.

Comparative Price Levels

In all the years shown Ireland has had a higher price level than the other two areas.  The gap to prices in the Euro Area was greatest in 2008 and has narrowed since then.  The gap to UK prices was widest in 2009 and the rate of convergence has been even greater.  As the inflation data above has shown this has continued into 2013 and, although Ireland still has higher prices, we can expect the lines to get closer still in subsequent releases.

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