Dáil Éireann Debate, Wednesday - 14 January 2015
129. Deputy Colm Keaveney asked the Minister for Finance to outline the assessment he has made of the risk that deflation may pose to the economy and if he is seeking to take action to counteract it; his views on whether deflation is of benefit to consumers; and if he will make a statement on the matter. [49458/14]
Amharc ar fhreagraInflation, as measured by annual changes in the Harmonised Index of Consumer Prices (HICP), has averaged 0.4 per cent in the first eleven months of 2014. As such, we continue to operate in a low inflation environment.
Headline inflation is being pushed down, among other things, by the significant declines in oil prices in recent months. Brent crude oil has fallen by nearly 50 per cent in euro terms (by over 55 per cent in US dollar terms) since June 2014. In this context, core inflation which excludes energy and unprocessed food prices has averaged 0.8 per cent in the first eleven months of 2014.
In terms of the impact, a distinction must be drawn between short and medium-term effects. In the short-term, low inflation or even falling prices helps protect real incomes and boost competitiveness. However, a prolonged period of low inflation or falling prices is problematic for a number of reasons. Firstly, the expectation of lower price levels in the future leads households and firms to postpone personal consumption and investment, therefore reducing aggregate demand. Secondly, it pushes up the real interest rate, which increases the real cost of borrowing. Thirdly, low inflation or deflation increases the real burden of debt.
In terms of addressing the risk of low inflation, the appropriate approach is to ensure solid economic growth. This is what the Government is doing by putting the public finances on a stable path and ensuring a banking sector capable of providing credit to support the real economy. It is also important to note that deflationary trends were highlighted as an economic risk in Budget 2015 and continue to be monitored in this regard.
