A down and out in New York in 1936 during the Great Depression

Deflation is that rare economic phenomena that tends to leave economists unmoved, but leaves consumers and borrowers feeling just that little bit uneasy.

Economists like deflation because it gives Ireland a lower cost base compared to competitor countries. But the average debt-laden borrower in Ireland sees things differently, because their obligations in servicing their debts become more burdensome.

Last week, as the Central Statistics Office (CSO) revealed that year-on-year consumer prices have fallen by an astonishing 6.5%, the reaction among most Irish economists was sanguine, arguably even complacent.

Deflation is great for savers. It helps Ireland to shrink its various asset bubbles and allows the country to improve its competitive position against its main trading partners.

This was the overwhelming chorus from the economics profession here, which accused anyone taking a different view of being a fearmonger.

Of course, as is often the case in this financial crisis, outside reporting of the story struck a generally different tone. For outside commentators the latest deflation figures summed up alarmingly the sheer scale of the economic contraction taking place in Ireland.

In fact, one of the world's most widely read websites, wikipedia, now includes Ireland, alongside Japan, as an example of an advanced economy suffering from the worst ravages of deflation.

The first problem when discussing this subject is defining deflation.

While everyone knows that deflation is a persistent fall in the general price level of goods and services, there is little agreement on how precisely you define "persistent" or even what goods and services really matter when considering how low and how far prices have fallen.

Either way, deflation has not been something Ireland has had to worry about for many years. Most western economies, with the exception of Japan, have barely considered the problem in the last decade at all. Most discussion of deflation usually concerns the huge morale sapping deflation of the Great Depression in the US when demand throughout the economy fell, people hoarded cash, asset prices plunged and consumer prices slid by 25%.

This prompted economist Irving Fisher to warn that, from time to time, economies can suffer from what he called a "debt deflation" trap or spiral. What he meant by this for individuals was that when the price of goods and services fall, it means the real cost of your debt actually grows. Or put it another way, the interest rate on your debt grows in inflation-adjusted or real terms.

Nobody dares say Ireland is suffering from a real debt deflation trap yet. But the comparisons with Japan in the 1990s, when there was a real debt deflation trap problem, certainly cannot be easily dismissed. Japan, during its so-called 'lost decade', suffered from a series of economic ailments, which were as follows:

* Falling asset prices, particularly for domestically-based equities and property.

* Insolvent companies and 'zombie banks'. This happens when companies and banks are not forced to realise their losses and are instead propped up for years by mis-allocated capital. In these cases these institutions start to inhibit the entire performance of the economy.

* Interest rates are cut to zero or near zero in order to make money cheaper in an attempt to kick start the credit system. However, such a response proves ineffective.

One hopes Ireland will soon diverge from the Japanese 1990s experience.

With rising interest rates and rising oil prices probably on the way, this should prevent any long term deflationary problem.

But the longer deflation persists, and savers benefit and borrowers lose, it is bad for consumer spending in Ireland.

It is worth remembering that debt as a percentage of after-tax income runs to about 170% in Ireland and it's probably worse among those who bought their first home in recent years. These people should be the key engine of the economy and private consumption, but deflation and paying down debt would prevent that happening.

So despite all the belly aching about 'rip-off Ireland', we can actually have too much of a good thing. Price drops are not always a good thing, at least not on a persistent basis.