ANALYSIS - Despite falling prices, hardly any Swede would say that costs of living have dropped in the last few months.

Month after month the prices are dropping in Sweden. Also in November this year the annual inflation rate was negative, -0,7 percent according to the latest figures from Statistics Sweden.

On the first sight, that seems to be a gift from heaven for the Swedes. What with the recession, fast increasing unemployment and high uncertainty about the near (economic) future, at least everything is getting cheaper.

However, is everything really getting cheaper? And if it is, that is hardly a reason to cheer.

Swedish inflation is far from negative. With 2,4 percent it is even among the highest in the European Union, according to Eurostat, EU Statistics office. Only Poland, Rumania and Hungary have had higher inflation in November.

The large difference between the Eurostat and Statistics Sweden arises from large differences in methodology. For example, the rental costs are calculated very differently. As that category is an important part of the inflation index, any difference has a large impact on the inflation number.

There is no way to say that one of the two methods is good and the other one bad. One can make a good case for both of them. However, it is a fact that hardly any Swede would say that his costs of living have dropped in the last few months.

But even they have, let us assume here that the Swedish inflation number is the ‘right’ one, that is no reason to be happy.

What deflation is for consumer that is a loss for the producer. The larger the losses for companies, the higher is the chance they will lay off workers. That in turn means that the consumer will have less money, not to speak about his willingness, to spend. To compete for the last few krona’s Swedes are ready to spend, companies are forced to slash their prices further, leading to another bout of losses and lay offs. Investment plans get put off as the future becomes more bleak every month.

This vicious circle means that deflation tends to hit the economic growth hard and cause much more damage than few percent of inflation. So before you erupt in cheers when Statistics Sweden reports that also in December the prices have fallen in Sweden, take a deep breath and think about it just for one more second. And prey that inflation will return to Sweden in 2010.

Edin Mujagic is a Netherlands-based journalist and macro-economy expert.