Infation Rate Falls in June

Infation Rate Falls in June
11 July 2011

Infation Rate Falls in June

According to the National Statistics Office of Georgia the annual inflation rate fell to 10.0% in June 2011. This alteration has caused an expectation of reduction of the inflation rate in society.

In September last year the rapid growth of prices was a big shock for Georgia. There were speculations about the main cause of the high inflation. Some experts said that the price growth was the consequence of wrong monetary policy; some thought it was the after-effect of imported products; mostly it was the effect of a bad harvest plus some other economic and political shocks.

The Consumer Price Index (CPI), which is the most commonly used way of measuring the inflation rate, mainly contains food, vegetables, fruits, beverages etc. In June, because of it being summer, supply of these products has grown which caused a decrease of prices.

Comparing the prices of June to the prices of May for the following foodstuffs: the price of apples has fallen by 72%, pear - by 70%, watermelon - 70%, grapes - 67%, cherries - 45%, peaches - 55%, green beans - 61%, cabbage - 37%, cucumber - 51%, tomato - 57%, beet - 48%, onion - 70%, garlic - 63%, and potatoes - 78%. As we can see fruit and vegetable were primary pretexts in the decrease of the inflation rate. These changes are very attractive but if we compare these indexes to 2010’s summer prices we’ll see that they have not changed at all.

“At the beginning of the year National Bank forecast that inflation would decrease in a few months which is also described in press releases of Monetary Policy Committee meetings,” commented Archil Mestvirishvili, Vice Governor of the National Bank of Georgia .

“I would like to note that prices are influenced by exogenous shocks and fundamental factors, changes in demand and inflation expectations. As a result of anti-inflationary measures carried out by the National Bank and the Government, demand-side inflationary pressures have been low in the last few months. This is a precondition, that once the temporary shocks fade away, inflation will start to fall. As a consequence, the inflation rate decreased in June. As for the sharp change in the inflation figure, it was the result of a decrease in fruit and vegetable prices that had significantly increased during the last year due to bad harvest in the region and temporary exogenous shocks.”

“Due to the base effect, a significant decrease in inflation is expected through September, because, as you might remember, the price increase was high in August-September last year. During this period the wheat price rose due to the bad harvest. Wheat price hikes resulted in high international prices of its substitute and related products. As for the long-term trend, the inflation target of the National Bank is defined at 6% in the medium term. Therefore, the National Bank will employ all its instruments to keep the inflation rate around the target.”

“The National Bank adjusts monetary policy in accordance with the inflation forecast. If the inflation forecast exceeds the target level, the National Bank will implement contractionary monetary policy as happened from June 2010 through February 2011. For this purpose, the National Bank applied the monetary policy rate and reserve requirements on foreign currency liabilities, open market operation and tightened macroprudential policy as well,” said Archil Mestvirishvili, National Bank of Georgia .

“In my opinion, such a rapid fall of inflation has no base,” believes Prof. Vladimer Papava.

“I can’t explain it. It looks like political bespeak that the National Statistics Office of Georgia takes from the Government. As we have the information in December 2011 annual inflation should be 8%. A sharp reduction will be very suspicious and that’s why they are changing it gradually.”

To the question has or hasn’t the policy of the National Bank been the determinative factor of this change Papava answered: “National Bank of Georgia (NBG) since autumn of 2010 has been trying to make the inflation rate more stable. Its policy is very correct. Besides this, NBG has more useful monetary policy instruments with the help of which it can influence the inflation rate more powerfully. But we have to take into consideration that a reducing inflation rate doesn’t mean reducing prices on food. In the consumer basket besides the food basket other products are included too.

Secondly inflationary effects can be caused by the wrong budget policy. It’s essential to reduce budget expenditures. Of course developing the infrastructure is very important but it causes inflation itself; and why when the Government decides to build a road should the work be done perfectly - so as not to have the same road fall in to disrepair again so soon, as happens very often.

And last but not the least a source of inflation could become Agricultural Policy. As we know 80% of the food in our country is imported and in recent times prices have been growing in those countries as well.

According to the National Statistics Office of Georgia in 2010 the only economic field in which was seen a reducing trend was Agriculture. In the other fields there was growth.”

Prof. Papava explains that generally, autumn is the anti-inflation period of the year. It’s a logical chain, because of the harvest the supply of food increases and this reduces the prices of food. He supposes that the reducing trend will go on in the autumn.

Written by Keti Chkhikvadze