The Deflation of The Irish

Ireland is leading the way in deflation.

When I was a young man, I found myself in a pub in Donegal, a remote part of Ireland, and as it approached midnight (when pubs would normally shut) I was ordering a round of drinks. Standing at the bar, next to a couple of grizzled old fisherman, I asked the landlady, “When do you close?” She smiled at the fishermen, paused and answered, “Well son, we close in September for a week.” Needless to say, I can’t remember much else about that night.

Unfortunately, pubs in Ireland along with many other such hospitality venues have suffered this year from the recession fueled by the virus-related lockdowns. Figures released yesterday highlighted that consumer prices are falling at an ever-increasing pace, with the Consumer Price Index declining by 1.2% year-on-year in September. That is the sixth month in a row that Irish consumer prices have declined on an annualized basis, increasing concerns that a similar price deflation to 2008-09 could be developing, as shown in the chart below.

We recognize that the world thinks of deflation as falling consumer prices, but the proper definition of deflation is related to the monetary side and whether money and credit is contracting. That’s where Ireland is interesting. According to, private sector debt as a percentage of GDP in Ireland reached an eye-popping 427% in 2016. Since then, however, it has declined, recording a level of 374% at the end of 2018. It is a contraction in private sector debt in particular that can be called debt deflation. Japan’s private sector debt has been deflating from the early-1990s. Public sector debt can still rise during deflation, as the Japan example shows, and this is what is probably starting now in 2020 for western economies. Public sector debt is going through the roof, but private sector debt is probably at the start of a long deflation.

The Irish stock market topped out in 2007 and it is still some 32% below that peak. Social mood is trending negatively in Ireland and, with private sector debt still incredibly high, deflation should be here for some time. Many in Ireland will be hoping that pubs can get back to normal so that they can drown their sorrows, perhaps with cheaper Guinness.

Ireland Consumer Price Index