14/5/15: The Happiest Deflationary Consumers of Ireland... April 2015 Data.

Good thing Consumer Confidence is booming in Ireland, cause otherwise we might get a wind that domestic demand for goods and services is going nowhere:

Now, how would we get such an idea. you might ask? Well, simples.com : take a look at consumer prices:

Spot the trend? That's right: CPI was down 0.7% y/y in April and down 0.6% on average over the last 3 months.

And in case you want to see what 'sustains' at least some semblance of non-totally-collapsing prices? Why here it is:

Well, the only reason we are not a complete basket case come inflationary dynamics is thanks to tobacco and alcohol (up whooping 26.5% over the pre-crisis average thanks to tax extraction by the State), and electricity and rents (pushing housing, water, electricity, gas etc up 7.1% over the pre-crisis levels - you might also call that tax extraction, for much of these increases goes to fund semi-states and quangos and soon-to-come Irish Water), Health (where much of the 'savage cuts' were just something masking the actual hikes in cost of services to those of us who pay for them), and Education (where state extraction of funds was so rampant as outpace by a factor of 10 overall inflation in the economy), and Restaurants & Hotels (where the cut in Vat did nothing to alleviate price pressures on consumers), and a bunch of state-related and regulated prices that went into Miscellaneous category.

And so just as with retail sales, deflation is now consistent with rising consumer confidence. Happiness attained, at last. Just never ask what happens to demand when prices (imported from the rest of the Euro area) start creeping up across all sectors... that is something polite Irish economy forecasters don't want to talk about...

Economics 10/06/2010: CPI & Industrial Production

Host of stats released today point to continued recessionary dynamics in the Irish economy and no turnaround in sight.

First, on consumer prices side. While the usual cheerleaders' squad of 'in-house' economists are singing the swan song of 'deflation is almost over', take a closer look at the composition of CPI changes and you can see that contrary to their claims, prices in categories that represent leading indicators for an uptick are still falling, month on month.

Per CSO: the most significant monthly price changes were

• increases in Housing, Water, Electricity, Gas & Other Fuels (+2.9%), Transport (+0.8%) and Food & Non-Alcoholic Beverages (+0.4%); and
  
• decreases in Clothing & Footwear (-1.1%) and Furnishings, Household Equipment&Routine Household Maintenance (-0.2%).

Detailed sub-indices show that:

• Education rose 9.1% in 12 months to the end of May, 2010
• Housing, Water, Electricity, Gas & Other Fuels was up 3.7%
• Transport was up 4.9%

So the return of inflation in Ireland - a turnaround sign for some - is driven by such hugely value-additive activities as:

1. Hikes in mortgages rates by the banks rebuilding margins (mortgage interest was up 6.1%);
   
2. Liquid fuels price hikes (+8.5% mom) due to our great Government idea of imposing a new tax on fuel which came in effect in May;
3. Higher cost of natural gas, courtesy of our regulated state-owned utility that is now offering competition in electricity markets, while jacking up prices in its core activities;
4. Cost of air transport (up 14% amidst collapsing demand)
5. Higher cost of petrol and diesel;
6. In Recreation and Culture group, there was a 4.1% mom increase in the state-controlled cost of cultural admittance;
7. In education, as numbers of students continue to rise, and as unemployed folks are dreaming about retraining, while financially stretched parents are seeking the ways to cut costs of raising children, our wonderfully accommodating state has ratcheted prices up by 9.1% yoy.

Oh yes, that does really suggest that "demand is improving" and "the economy is turning the corner".

All in, Ireland has now enjoyed an unprecedented 17 months of deflation. In statistical terms, we've hit the bottom and are now returning to positive price inflation territory, slowly but surely, But in economic terms, price increases are driven not by demand, but by the state diktat. desperate to claw as much as possible out of the economy into its own coffers, our state is inventing ever more elaborate schemes to get to our pockets. And with it, the banks too are getting bolder by the day. Instead of a turnaround, all of this smacks of a threat of a renewed pressure on household incomes, and, thus, on the economy.


And, of course, there isn't much of sunshine in the industrial production data released today either. Overall, Irish industrial production was don 11.8% mom in April in terms of production index and up 2.6% in terms of turnover index. Of course, Irish industrial production is the most volatile in the OECD so one must not be tempted to read too deeply into these figures. However, what is clear is that with such dramatic rate of decline, there isn't any signs of an uptick on industrial production side either.

Which, of course, means I am not changing my earlier forecast for GDP growth of -0.3-0.7 in 2010 and GNP growth of -1.0-1.2%. No matter what Ibec or anyone else says...

Deflation is cemented, but Government rip-off continues

The above table, courtesy of Ulster Bank's economics team, is revealing.

CPI is now anchored firmly in the deflation zone at -1.7% for February - a record rate of deflation since Q1 1960 (when CPI fell 2%). Prices actually fell 0.4% last month, but because in February 2008 prices grew by 1.2%, the overall difference amounted to -1.7%. So don't be surprised if you are not feeling that easing on your household budget (other than house payments), yet.

The HICP harmonised measure (ex mortgage rates) fell to +0.1%, the lowest in history (since 1997). This implies that CPI fall off was dominated by the ECB-driven declines in the cost of mortgage finance. The average mortgage cost declined 8% in February and is now down 26% on a year ago. This is certainly helping many households to stay afloat, given rapid deterioration in after-tax disposable personal incomes and rising unemployment.

Now, do the math - if the ECB rate-cuts cycle is to run out of steam by H2 2009, as expected at ca 0.75-1% level, total savings on average mortgage will amount to a total of 33% off their peak. Assuming an average mortgage burden of 30% of the household budget at the peak, this will shift overall mortgage burden to ca 22% of the budget. Assuming income tax, VAT and other housholds-related measures stay on course laid out in Budget 2009, mini-Budget will result in a fall in the household disposable income of 3-5%. Add in expected fall in earned income (due to slowdown and rising unemployment) and we have a recession-induced 13-19% decline in the disposable income. Thus, the average mortgage burden for the household will rise back to 26% at the bottom of the ECB rates-cut cycle, virtually canceling any positive effects of the ECB rates cuts on households' balance sheets.

Another feature of the figures above is the collapse in prices in the clothing and footware sector - normally the sales end in February (between 2002-2008, February saw the first monthly increases in prices in this category for the year, averaging some 12%). This year, the increase was only 7.5% - lowest since 2000.Overall, in January we recorded the steepest drop off in prices in this category in the Eurozone.

But as always, it was in the Government controlled/regulated sectors where price changes were out of sync with the rest of economy. Health insurance costs were up 21%, house insurance was up 17%. Education was up 5.5% in February after a 5.6% increase in January, health was up 4.8% in February after an increase of 5.8% in January. Government-sponsored rip-off of consumers is still alive and kicking. (Note: of course, house insurance is not directly priced by the state, although it is a part of the regulated sector. Possible causes for the rise in house insurance in recent months might include inclement weather payouts and, more importantly, insurers using all means possible to strengthen their capital reserves positions. The latter is a function of regulation and markets assessment of inherent risks. Both, in turn, are functions of the public sector actions/inactions, although indirectly).

While private sector prices were down 0.1% in the last 12 months, Government-controlled prices were up and the rate of increases is accelerating. In 12 months to January 2009: Gas prices were up 20%. Health insurance +19%, Electricity +17%, Bus and Rail transport +13% & +9% respectively, Hospital services +7-9% (out-patient v in-patient). Total Government-controlled inflation +14% for regulated services in year to February 2009.

Overall, I expect the CPI to average -3% for 2009 as a whole.