Deflation shows up in Greece: Inflation at -0.2% in March 2013

Posted by keeptalkinggreece 

Greece’s consumer inflation dropped. According to Greek Statistics authority ELSTAT, it eased to an annual -0.2 percent pace in March from 0.1 percent in the previous month.

Herewith , it reached the lowest level after 46 years, since May 1968 when inflation hit -3 percent.

Inflation eased in March 2013 despite the price increases primarily in heating oil (+26.9%), electricity (+12.3%). In food items prices increases have been recorded primarily in fresh potatoes (+27.9%), fresh fish (+2.7%), fresh fruits (2.3%) and minor increases in dairy and eggs (+0.6%) and meat (+0.4%).

Prices increases were also recorded in cigarettes (+5.9%), clothes-shoes (+2.1%).

Most significant price decreases were recorded in medicine (-14.6%), home appliances (-8.4%), computers (-5.7%), cars (-5.3%) and telephone services (-5.1%).

Deflation occurs when the inflation rate falls below 0% (a negative inflation rate)

From what I understand, Greeks spend more money to cover up basic needs (food, electricity, heating) but spend less to buy a washing machine, a computer or a car. Taking into consideration the severe cuts in wages, pensions, the income in general, and the sharp increase in taxes , what would be the priority of recession-hit Greek household? A cheap car or food and electricity?

OK, a low inflation increases the value of money: you buy more goods for less money. But this provided, you have a steady medium to high income which is not at risk due to possible work place loss, tax increases and other instability factors. Otherwise, you end up paying the high prices for basic goods and consequently turn your head away from the cheap ones, you don’t definitely need.

“This is the first indication of deflation” experts told economic news portal Capital.gr, stressing that the deflation arrives with time delay. “Recession started in 2008, for 2013 it is estimated at 4.5%, and yet until recently prices kept on increasing. Experts worry to see that prices in basic goods remain high.

It is not clear, whether this deflation is temporary or permanent.

What does it mean in practical life and consumer behavior? Most probably that citizens will keep cutting expenses once they realize they pay less for goods they don’t need and more for goods they need. This will lead to lower production and consequently to lower prices.

Economists generally believe that deflation is a problem in a modern economy because it may aggravate recessions and lead to a deflationary spiral. A deflationary spiral is a situation where decreases in price lead to lower production, which in turn leads to lower wages and demand, which leads to further decreases in price.

Full ELSTAT report in English: Open PDF here

PS I would appreciate any experts’ comments on where this rate could lead Greece