"Don't worry about deflation..."

[Brendan Burgess]

A great article by Dan O'Brien in yesterday's Indo.

Don't worry about deflation, just enjoy the fall in prices while it lasts

I was very confused by a lot of the fears about inflation and this article clears it up a fair bit.


While there is some reason to be concerned about falling prices, most people's intuitive sense - that lower prices are a good thing - is correct.

There is not a shred of evidence to suggest that the average Irish or European Joe is holding off buying the new flat screen he covets (or anything else for that matter) because he thinks he might get it a little cheaper in six months' time.

It should also be said that falling energy prices are good for the Irish economy and in no way bad.They are equivalent to a tax cut, freeing up more disposable income.

 

[Brendan Burgess]

However, if we should not worry about deflation. And if interest rates are 0.05%, then why do we need QE? Is it that QE reduces long term interest rates?

 

[demoivre]

I'm surprised Dan has ignored the fact that when you owe a lot of money, which the households and the public and corporate sectors in this country does, deflation is not what you want. Inflation reduces the purchasing power of money and consequently reduces the burden of debt repayment. QE is needed because the expansionary monetary policy of lowering ECB base rates hasn't worked, largely because of the failure of retail banks to pass on the savings. SVR mortgages being a case in point.

 

[Protocol]

I fully agree that the oft-stated worry of economists that deflation will cause a postponement of consumption is not true.

However, demoivre has a point, as deflation makes it very difficult to recover from the financial crisis, as repayments of debts are harder.