Source OECD
| | 2007 | 2008 | 2009 | 2010 | 2010 | 2011 | ||||
| Sep | Oct | Nov | Dec | Jan | Feb | |||||
| France | 1.5 | 2.8 | 0.1 | 1.5 | -0.1 | 0.1 | 0.1 | 0.5 | -0.2 | 0.5 |
| Germany | 2.3 | 2.6 | 0.4 | 1.1 | -0.1 | 0.1 | 0.1 | 1.0 | -0.4 | 0.5 |
| Ireland | 4.9 | 4.1 | -4.5 | -0.9 | -0.1 | 0.0 | -0.1 | 0.2 | -0.2 | 0.9 |
| Spain | 2.8 | 4.1 | -0.3 | 1.8 | 0.1 | 0.9 | 0.5 | 0.6 | -0.7 | 0.1 |
| United Kingdom | 2.3 | 3.6 | 2.2 | 3.3 | 0.0 | 0.3 | 0.3 | 1.0 | 0.1 | 0.8 |
Ireland’s speculators and borrowers will now begin to suffer in deflation or very low inflationary times. The constant wage increases that destroyed our competitiveness will now cause extreme pain as they are reversed. The euro removes the opportunity to devalue so it must be done the hard way.
When we compare Irelands consumer prices index to England, France, Germany and Spain over the last five years the dramatic falls in prices are evident. However what we don’t see is the reason why Ireland has suffered such deflation in recent years. The main reason for worldwide deflation in the last 5 years was a shortage in the supply of money and a global recession. Irelands case is slightly different, inflation rose 50% between 1996 and 2008 what we are experiencing now is mainly a correction .Our four neighbours did not experience such inflation before the recession so do not have endure the massive correction as we do.
Ireland experienced export led growth up until 2001 since then we have experienced domestic led growth due to an increase in money supply due to low interest rates and cuts in taxes. Average wage levels increased by 40% between 2000 and 2006 at the same time income tax rates were dramatically reduced.
Low corporation tax levels allowed international investors ignore rising wage costs. This 12.5 % rate allowed companies pay excessive rates across the board. When Ireland is compared to its competitors it is an expensive place to do business from waste disposable, energy cost to wages Ireland is amongst the most expensive in the world.
Our low levels of income tax allowed the ordinary public to ignore the constant price excesses.
Source cso
Inflation the causes and the reversal.
In Ireland from 1996 to 2007 we suffered from inflation due to several reasons this situation was unsustainable . From 2007 to the present day Irelands excessive costs are been reined in. However world wide commodity prices are soaring slowing the deflation figures and leading to fears of a return to inflation in Europe. If European interest rates dramatically increased Ireland could well fall in to another deflationary spiral.
· Demand pull
Excessive demand for houses pulled up prices. This situation was made worse by speculation.
In 2007 demand for houses began to weaken and the speculators left the market. Houses prices had risen to such levels the buy to let investors had also left the market.
· Cost pull
Public sector trade unions and the benchmarking agreements force up inflation due to wage demands. Semi state monopolies such as the ESB also forced up prices. In 2008 Electricity was between 20 and 46% more expensive than our European neighbours. In 2008 energy regulation intervened to break up Electricity monopoly driving prices down by up to 24 %.
The public sector has also been reduced in the form of levies and a cut in over time.
· Sectoral inflation
Excessive demand year on year in the construction sector drove labour prises up .This situation was made worse by trade unions wage demands.
The hotel and service sector also suffered excessive demand not from tourist but the Irish public .With 90% of hotel rooms in 2006 occupied by Irish residents.
In 2008 the construction sector collapsed due to falling houses prices and the realisation of a massive over supply. As the excessive money supply ran out for Irish residents the overpriced serviced sector suffered.
As local stopped staying in hotels the massive over supply of beds due to tax incentives became apparent.
· Monetarism
The oversupply of cheap money from the EU into the Irish economy was made worse by tax cuts and incentives.
In 2007 Irish banking practices caused major problems where they borrowed money on a short term basis and lent it out over 25 to 30 years . This led to a massive short fall of funds when interbank lending dried up due to an international banking crisis. As the construction sector and then economy collapsed international lenders saw Ireland as very risky and stopped lending.
Source Department of the Enviroment
Inflationary effects
· Reduces the value of money this could be seen in Ireland for years as the Euro was described as been worthless.The Euro was losing its purchasing power however this had nothing to do with the actual currency and everything to do with price increases.
· It encouraged massive speculation in the Irish property market and stock exchange. This situation would have been bad enough if left in the hands of professional speculators however the general public in Ireland decided that it was easy money and joined in.
· When inflation rates are higher than interest rates, we get negative interest rates which are seen as good for borrowers and bad for savers as their hard currency is losing value. In Ireland vested interest economist appeared on TV explaining this simple economic theory. There was one very important fact they left out negative interest rates can’t go on forever especially for the life of a mortgage.
· Investors will shun countries with fluctuating inflation as it is very difficult to plan for the long term. In Ireland foreign direct investment is seen as the back bone of our economy.
Source cso
Source NCC Report 2010
Source NCC Report
Source NCC Report
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