Thursday, March 18, 2010

Economics 18/03/2010: Services Inflation in Ireland

CSO released an interesting set of new stats on price inflation in select services. Per experimental Services Producer Price Index (SPPI) average prices charged by domestic service producers to other businesses in Quarter 4 2009, were on average 4.1% lower in the year when compared with the same period last year.

The most notable changes in the year were:
  • Architecture, Engineering and Technical Testing (-9.7%),
  • Computer Programming and Consultancy (-8.5%),
  • Advertising, Media Representation and Market Research (-7.2%),
  • Freight and Removal by Road (-5.2%) and Air Transport (+6.3%).
Services Prices increased by 0.4% in the quarter. This compares to a decrease of 2.3% recorded in Q3 2009.

The most significant quarterly price decreases were in
  • Freight and Removal by Road (-2.2%),
  • Postal and Courier (-1.4%) and
  • Sea and Coastal Transport (-1.4%).
There was an increase of 4.8% in Air Transport.

Now, what CSO report did not show is the following. While deflation in higher value added, human capital-intensive services was rather significant, mid-range value-added services saw much more moderate deflation, with low value added labour-intensive sectors such as security services holding up almost unchanged over time. Chart below illustrates:
For all the talk about improved competitiveness, transport-related services costs are still on the upward trend:
And this is before Carbon Taxes kicked in.

Another interesting point to be made here is that the first chart above appears to suggest that deflation is almost not happening at the level of sectors that are labour intensive - industries most impacted by the minimum wage. In more wage-flexible sectors, where human capital drives value added to much higher levels, inflation is running negative. This has two implications going forward, should this trend persist:
  1. Despite all the talk about the 'poor' bearing the brunt of the crisis, at least as far as prices charged for services indicate so far, there is most likely stronger deflation of wages at the higher end of wages distribution;
  2. While competitiveness of our traded and higher value added services is increasing, competitiveness of our domestic services (anchored in higher labour intensities) is not improving significantly.
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