Kathleen Lynch (Cork North Central, Labour)
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Question 66: To ask the Minister for Finance his views on the record levels of deflation recorded by the Central Statistics Office in October 2009; his further views on the long-term effects of continued deflation on the economy; if he has conducted an impact study on the effects that cutting €4 billion from the economy will have on continued deflation; and if he will make a statement on the matter. [44862/09]

Brian Lenihan Jnr (Dublin West, Fianna Fail)
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As measured by the Consumer Price Index (CPI), prices in Ireland fell by 6.6 per cent in the year to October. This is the largest comparable fall since the 1930s. On a harmonised basis the falls in prices are set to be the largest in the euro area this year, and are set to fall next year as well. This will bring about a welcome improvement to our relative price levels and assist with a much needed improvement in our competitiveness. As well as this, lower consumer prices are increasing purchasing power at a time of falling nominal incomes.

There are risks to the economy if an episode of falling prices is sustained. However, the phenomenon of falling prices which is now under way is a temporary one, mainly driven by lower interest rates, the pass-through of the depreciation of sterling and the fall-out of the spike in energy prices of 2008. Consumer prices are forecast to fall again next year, albeit not to the same extent as this year. The euro area recorded a return to positive year-on-year inflation in November. Over time, the inflation differential between Ireland and the rest of the euro area will not diverge substantially. Most recent survey and market-based expectations suggest that there is very little risk of a sustained period of deflation in the euro area.

As is the normal practise, my Department has assessed the economic impacts of illustrative fiscal adjustments using the ESRI's macroeconometric model. These likely economic impacts will be taken into consideration in the design of the overall Budgetary package.