Deflationary food for thought

Apologies for the gap in posts, normal service will resume next week when the new site is launched! In the meantime, I’ll present some food for thought on Irish inflation. It’s become an accepted ‘stylized fact’ that prices in a modern economy keep on rising and on average that they rise slowly and steadily: slow inflation/disinflation good, rapid inflation/deflation bad. Now that Ireland is slipping/marching/dandering into deflation (prices for the first quarter of 2009 were 3.1% lower than the 2008 average), no harm having a closer look at prices and how they trend.

Looking at Irish prices over the past thirty years, here are some things that surprised me:

  • Prices for furniture and household equipment have fallen each and every year since 2003 – that’s a seven year deflationary spiral (presumably quality-driven, as TVs and computers get cheaper and better) that no-one’s lost any sleep over.
  • Over the last twenty years, the typical (i.e. median) year saw a 3% fall in the prices of clothing and footwear. That particular sector is on a 15-year running streak of falling prices. Clothes prices are at the same level now as they were in 1980!
  • Prices for communication have fallen in 13 of the last 30 years. The typical fall is 0.2%. Communications prices are at levels similar to those seen in 1983!
  • Every commodity group bar three (there are twelve in total) has seen prices fall at some point in the last 30 years. Those three are alcohol and tobacco (prices are largely determined here by taxes the governments put on them), tourism and healthcare. (Prices for recreation and culture are only falling now, -0.3%.)
  • These falls in prices are getting more common over time. There were only 4 instances of falling prices across the 12 groups in the 1980s, compared to 15 in the 1990s and 25 between 2000 and 2008.
  • There will more than likely be a further 8 instances of falling prices this year – the four exceptions being alcohol/tobacco, health, education and miscellaneous.

The graph below shows the typical (median) rate of change in prices in a particular set of goods since 1990. It’s clear that some sort of gradual general increase in prices across the board is not the norm. Prices vary by sector and are at first glance very much under the influence of policy, as well as other factors such as competition and technology, and it’s probaby worthwhile that this ability to influence prices is incorporated a little more into policy debate, particular when looking at those sectors where costs continue to rise.

Typical change in prices, by sector, 1990-2009

Typical change in prices, by sector, 1990-2009