fimmtudagur, mars 26, 2009

inflation

Ask an Icelander on the street (or in my office) what the inflation number is so far in 2009, and they'll quote you something in the range of 15-20%. That's because the most-often quoted inflation number is for the trailing 12 months. The current number quoted by Hagstofan (or "Statistics Iceland" as they call themselves somewhat demeaningly in English) is 15.2% for the 12 months through March 2009.

However, dig a little deeper and a quite different picture emerges. That 15.2% headline number includes the October-December 2008 period when Icelandic inflation was roaring like a mighty lion. The Icelandic króna lost much of its value in October and that meant that the prices of everything Iceland imported (a lot of what it consumes) went through the roof overnight.

However, Iceland is in a serious recession and recessions are almost always deflationary. Meaning, prices tend to go down. This only makes sense: clothing stores put jeans on sale to clear out inventories (sometimes even at a loss), out-of-work painters suddenly want to come do your whole house for less than they would have charged last summer, and even movie theaters start having special 2-for-1 ticket deals. All of these things are happening in Iceland: at long last prices are coming down.

So, looking at just the first 3 months of 2009, the annualized inflation is a meagre 1.94%. This is far below what Icelanders have become accustomed to in recent years, and is also under the Central Bank's inflation target of 2.5%. Not only that, but between the months of February and March, prices actually fell by 6.9% at an annual rate! I say this with the caveat that annualizing (and thus extrapolating) short periods is fraught with danger, and whether this trend continues into the summer is anyone's guess. However, deflation is the watchword in America and Europe these days, so the prices of goods Iceland imports could continue to fall, adding to the pressure on struggling Icelandic merchants to mark down their prices.

So, contrary to orðið á götunni ("the word on the street"), I believe that Iceland is in for a period of noticeable deflation, or at the very least, price stability. And this would at last be some good news for those holding inflation-indexed króna loans.

Play with the data yourself here and tell me what you think. Also, more info on the March numbers is here and a good FAQ on the Icelandic CPI, including recent changes to the way cars and package holidays are priced, can be found here.

4 Comments:

Anonymous Biskupinn said...

Thanks for a very interesting post! I am encouraged by this news and really hope it holds. Does this mean that the rules of economics are holding sound here? I've always had a (rather naiive and ill-informed) opinion that the Icelandic economy is small enough to have low inertia: i.e. an ability to change course much faster than behemoths like the US or German economies.

To what extent does the 'special' nature of Iceland lend weight to this argument? The culture, the tightness of society, the willingness of many Icelanders to hark back to old times and smilingly tighten the belt. I've seen many people proudly proclaiming their thrift, the local ski area thronging with families that would otherwise be in the Alps, and even I'm proud to be driving a car from 1994.

I'm far less credible as an economist than you, so I'l enjoy the luxury of waiting to see if you're right...

26.3.09  
Blogger Don in Seattle said...

Excellent information, and as always, very informative. This is hard factual detail that is so difficult to find. Great Job!

Thanks, Jared

Don (Seattle, formerly Swampscott, MA)

27.3.09  
Anonymous Nafnlaus said...

The concern, of course, is that the deflation is a sign of something bad, rather than the result of the IMF's austerity measures.

One characteristic of the Great Depression was 10% annual deflation, brought on by increased competition for jobs (and a willingness to work for less than the other guys), and increased competition for customers (and a willingness to sell for less than the other guys).

It's hard to know where the bottom is.

29.3.09  
Blogger JB said...

Yes, deflation is almost everywhere in the world considered a Very Bad Thing. It's a downward spiral of prices and jobs, with rising unemployment.

Here in Iceland, there is one important mitigating factor, and that is that most ISK debts are indexed to inflation. So, if deflation happens here, as it did last month, debt burdens are reduced, not increased, as they are everywhere else in the world.

31.3.09  

Skrifa ummæli

Links to this post:

Búa til tengil

<< Home