Ireland’s June deflation speeds way past eurozone.

Ireland’s economy is now undeniably in CPI deflation. Arguably, it is so because their private sector indebtedness ratio was almost twice as high as that as of the rest of the Eurozone. So they are deflating more. Reuters feed. July 09, 2009.

UPDATE 1-Ireland’s June deflation speeds way past eurozone.

DUBLIN, July 9 (Reuters) – Ireland’s consumer prices fell sharper than expected in June and at the fastest rate since the Great Depression, widening the gap with the rest of the euro zone and raising the risk of a prolonged recession.

Irish prices have been falling since the start of the year, helping the country to claw back competitiveness lost during the boom years of the highly-leveraged ‘Celtic Tiger’ economy.

But economists have warned a prolonged deflationary spiral could make it increasingly difficult for consumers and businesses to repay debts as their wages and profits slide.

The Irish consumer prices index (CPI) fell by a stronger-than-expected 0.3 percent in June to stand 5.4 percent lower than a year earlier, the biggest annualised fall since May 1933, data showed on Thursday.

The median forecast of eight Dublin-based economists polled by Reuters had been for a 0.1 percent fall in June’s CPI, giving an annual negative rate of inflation of 5.25 percent.

The Harmonised Index of Consumer Prices (HICP), which is used for intra-EU comparisons, was flat on the month to give a year-on-year rate of -2.2 percent, versus a 0.1 percent year-on-year fall across the 16-nation currency area last month.

‘Our private sector indebtedness is equal to around 175 percent of GDP which is well above the eurozone average of 98 percent,’ said Alan McQuaid, chief economist at Bloxham.‘It means that a period of deflation could have a particularly negative impact for us…it raises the chances of a sharper rise in banks’ bad loans,’ McQuaid said.

Prices are expected to keep falling over the rest of the year. Ten economists polled by Reuters had a median forecast for a 4.25 percent drop in consumer prices in 2009. So far this year, consumer prices are down around 3 percent from a year ago.

Some analysts pointed out that Irish prices, which ramped up dramatically during a property boom, had further to fall compared with the rest of Europe and the country’s export sector needs the gap to tighten significantly yet.

‘The downturn the Irish economy has faced has been more severe than any other industrialised country, you would therefore expect underlying (downward) inflation pressures to be more intense,’ said Simon Barry, senior economist at Ulster Bank.

But employers fear a four-day-old nationwide strike by electricians over wage rise demands could cripple industries already weakened in the recession as picket lines block access to hundreds of construction sites and factories.

But one economist said the strike could still turn out to be an isolated incident in the depressed economic environment.

‘I don’t think there is much appetite on a wider scale for strikes at the moment or any kind of industrial unrest given the rate at which unemployment is still increasing,’ said Deirdre Ryan, economist at Goodbody Stockbrokers.


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