Sir, – Your correspondent Eoin Burke-Kennedy (August 8th) is too pessimistic about the dangers for the Irish economy of deflation. While price inflation at 0.3 per cent is running well below the ECB’s “close to but less than 2 per cent” target, this should be seen in the context of real GDP growth in Ireland of nearly 3.5 per cent. Overall, this implies a growth of nominal GDP of nearly 4 per cent.
The big downside with deflation is when nominal income falls, making debt service more burdensome. This is especially true in respect of the impact on the public finances.
Irish price and wage inflation have been significantly lower than in most euro zone economies since the onset of the present crisis, which is exactly what is required to help improve Irish competitiveness.
Given what has been happening to money wages and near zero returns on savings, the present very low inflation has saved many people from even more severe cuts in their real purchasing power. Deflation is much more of a danger to economies with near-zero real growth, such as France and Italy. – Yours, etc,
JOHN SHEEHAN,
Willbrook Lawn,
Rathfarnham,
Dublin 14