Inflation and consumption in Ireland

Abstract

In inflationary times, consumers have limited, mainly out-of-date, information on the general level of prices. Consequently, when the general rate of inflation accelerates unexpectedly, consumers tend to mistakenly regard the higher prices for certain goods that they observe as higher relative prices for these goods - that is, relative to the goods for which they only have out-of-date price information. Accordingly, they buy less of the apparently more expensive goods. This, in a nutshell, is the theory advanced by Deaton (1977) to explain the high levels of saving observed in the United Kingdom and the United States in recent years. In this note, Deaton's aggregate consumption function is applied to Irish data covering the period 1948-1976 with a good deal of success. It is suggested that this theory represents an advance on consumption theories previously applied to Irish data.