Deflation at consumer prices level is a two-edged sword. Whilst it normally rises savings and delays consumption, it also helps households stuck in debt to deleverage faster and it beefs up surplus savings available for investment.
But deflation at producer prices level is a case of gained competitiveness at the expense of future growth as it reduces value added in production and lowers future investment. It also leads to reduced hiring and can lead to cuts to the workforce.
Behold Ireland's pain...
Drilling into specifics:
- Export prices down 3.6% y/y and domestic sales prices down 1.1% y/y. Yes, exports price changes can be down to FX volatility, but no - this means nothing much as lower prices still mean lower revenues.
- On upside: dairy products prices were up 12.6% y/y, wood and wood products prices up 10% y/y. Good news for least value-additive sectors of Irish economy. Other manufacturing prices were up 1.3%, beverages up 2.2%. And durable consumer goods industries prices up 1.3%.
- Beyond that, almost everything else is either flat or down. You can see the details in the last column in Table 2 linked above.
- One to watch: prices of energy products are down 17.2% y/y and petroleum fuels down 3.2%. Let's see if our heroes at state-controlled energy behemoths are going to pass any savings to consumers (hint: I doubt it).
So overall, not good news - sustained pressure on producer prices. Negative m/m inflation is now recorded in every months starting with October 2013 and on the annual basis, prices-signalled activities in the economy are running at the rates of growth consistent with late 2012-early 2013, not with a strong rebound. Of course, this is just a signal...
I suggest taking a look at PPI for Manufacture of coke and refined petroleum products (although eurostat does not publish an index for that sub-sector) could this be a case of cost-push deflation?
ReplyDeleteA further question I have is the following: if due to deflation demand picks up wouldn't that support capacity utilisation for manufacturers?
In order for consumers to delay consumption deflation expectations should be firmly anchored a la Japan, right? Isn't Europe a bit far from that point?
Any answer would be appreciated, thank you for your time.
cost-push is a fair point. Irish energy costs are falling, at wholesale levels. See table 5 here: http://www.cso.ie/en/releasesandpublications/er/wpi/wholesalepriceindexmarch2014/#.U2Pq1q1dWzh
ReplyDeleteThe problem is that we are seeing sustained falls in exports prices and sustained rises in home sales prices (albeit moderating and going into deflation in more recent months). Cost-push would probably matter more for the latter (meeting sluggish demand) than for the former, yet they don't. So my view is that cost-driven (and FX too) deflation is probably closer idea for export prices.
Still - very valid point, imo...