Consumer prices go down for second month running

Bank of Finland’s Suvanto sees no threat of deflation yet

Antti Suvanto

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Consumer prices declined in Finland last month for a second month running. In June the decline was a modest 0.1 per cent, but in July it reached 0.6 per cent.
      This has sparked concern of a possible deflationary spiral, which might kill economic growth as buyers wait for prices to go down more, and which could impose an even greater burden on those who are paying off debts.
      However, Antti Suvanto, the head of the Department of Monetary Policy and Research at the Bank of Finland, seeks to calm fears.
      “There are two factors behind the consumer price trends of the summer: the high prices of fuel last summer, and lower interest rates. No extensive price falls are in sight”, he says.
     
Statistics Finland backs up this view, noting that in addition to low interest rates and cheaper fuel, consumer prices in July were pushed down by cheaper houses and apartments, used cars, and telephone calls.
      These factors pushed the inflation index down, offsetting the upward pressure from higher prices on food, rents, restaurants, health care services, alcohol, and tobacco products.
      Suvanto says that economists are not worried about declining prices in other European countries, where similar figures of negative inflation were released on Friday.
      However, the methods of calculation used in many other EU countries differ significantly from the consumer price index that is used in Finland.
     
Deflation would be very bad news for European economies, which appear to be rising out of the recession unexpectedly quickly.
      Germany - a vital customer for Finnish exporters - and France reported last week that their economies are growing again, and in Italy, the slide has evened out somewhat.
      The engines of the boom are to be found in Asia, where China is experiencing fast growth, and India is also in positive territory. In the world’s largest national economy, that of the United States, the worst recession since the Second World War is expected to be declared over at the end of the year.
     
Even if Suvanto is right in allaying fears of deflation, Finns might do well to get ready for lower consumer price development in the autumn as well.
      One reason for this is the cut in value added tax on food, which takes effect from the beginning of October. The move is expected to bring down the price of food by 4.3 per cent. The impact will be significant, as foodstuffs account for a full 13 per cent of the entire index.
      The deflationary effect of the reduction of VAT on food is compensated by the increase in the upcoming tax on alcoholic beverages, which is leading to a price rise of about 4.5 per cent, according to Statistics Finland.
      The proportion of alcoholic beverages in the cost of living index is not very high - only 3.6 per cent.
     
A negative cost-of-living index two months in a row is very rare in Finland. In recent history it has happened only once, in the spring of 2004, and that drop was caused by alcohol prices. The tax on alcoholic beverages was sharply lowered out of fear of increased illegal imports, and the cheaper drinks brought the index into negative territory for a few months.


Previously in HS International Edition:
  Alcohol tax going up next year (19.11.2008)
  Finance Ministry: lower taxes, less inflation; recession can be avoided (19.11.2008)

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