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Rational analysis of inflation in Bulgaria
submited on 15.09.2007 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
submited on 15.09.2007 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
Explanations of some goods’ rising prices in Bulgaria are to a large extent wrong, leading therefore to some wrong policy recommendations. Here are some wrong perceptions:
• The rising food prices are a result of a local agriculture problem; hence we must support local farm business,
• The cost of living, as measured by the National Statistical Institute, justifies the pressure for higher wages in the state sectors and higher social payments,
• The individual consumer is completely helpless against the rising cost of living, i.e. he/she is infinitely immobile as regard to goods and services, which they purchase as well as the place where they purchase.
Agriculture prices and Euro inflation
Inflation of main currencies, which we usually use for measuring value – the dollar and the euro, was considerable in the period 2004-2006. The currencies lost substantial part of their value, as measured in the main tradable industrial commodities.
What is important is that the global inflation could not fail to affect the Bulgarian open economy. Furthermore, the currency inflation, although in the beginning being implied mainly in higher price growth of metals and other industrial commodities, could not bypass the farm production. In the 12 months to August 2007 food commodities’ prices went up by around 30%, denominated in dollars. Price growth was slower, denominated in euro, but still it was faster than the public consensus, especially on ? background of the historic tendency toward deflation of agriculture prices due to rapid technology boom and sector productivity improvement.
The process of rising agriculture prices is global and has in its essence monetary nature (i.e. inflation of the main currencies), rather than being simply related to current supply shortage. These global arguments must explain larger part of the latest registered price growth in Bulgaria. This statement holds in case the agriculture market in Bulgaria is not burdened by new taxes, administrative expenses or trade limitations.
That is the reason why we do not expect to observe agriculture production prices going downward (under a scenario without any fundamental technological change), i.e. we expect the relative prices – prices of farm production, as measured in quantity of other goods, to head toward levels before 2004.
Different inflation for different consumers
The average annual inflation according to the Consumer Price Index (CPI) is 6.2% to August – lower than inflation in 2006 (7.3%), but still far beyond expectations of the government and independent macroeconomists in Bulgaria. The CPI is an “official” estimation of the cost of living, i.e. the change of household expenditure for one and the same quantity of goods and services. Because this is the “official” estimation of inflation for the average Bulgarian consumer, upon these digits are also based most of the requests of syndicates (and not only) for higher budget wages and higher social payments.
Inflation could differ considerably according to the structure of the consumer basket. This means that, from a statistical perspective, the methodology of NSI must be close to perfection for estimating the average cost of living, in order to serve as a foundation for policy decisions. If the statistics was not sufficiently fast in reflecting the ever changing consumer basket, the estimations obtained will not hold true.
If consumers increase the share of products, that become cheaper, in their basket, then inflation will be lower than estimated. But what is more important is that different models of consumer behavior are related to different consumer inflations.
The policy of state-determined income must take into account different CPI for different consumers. The recent data in fact supports the stronger pressure toward increasing state income, since people with lower income experience higher inflation. However, historically the trend is somewhat reverse.
Individual consumer choice has its importance
The individual consumer can influence his/her own inflation via changes in the structure of the consumer basket. The idea that the consumer is a helpless victim of the rising cost of living does not seem logic on the background of the changes in the consumer basket, which obviously follow shifts in relative prices. Consumers change the place of different products, not only substitutes, in their consumer priorities.
It is important to know that despite the average price growth of farm production, not all prices grow at equal pace. This allows for individual optimization in a moment of inflation as the current. In the long term the sufficiently significant differences might remind farmers that their individual decisions for investment allocation also matter.
Regional price differences also provide a good foundation for regional optimization. One and the same quantity of leva buys different consumption in different Bulgarian cities. Mobility can turn out helpful to the average Bulgarian in such moments, notwithstanding he/she is not used to it. Thus, mobility can replace the expectation of state interference in the free prices.
• The rising food prices are a result of a local agriculture problem; hence we must support local farm business,
• The cost of living, as measured by the National Statistical Institute, justifies the pressure for higher wages in the state sectors and higher social payments,
• The individual consumer is completely helpless against the rising cost of living, i.e. he/she is infinitely immobile as regard to goods and services, which they purchase as well as the place where they purchase.
Agriculture prices and Euro inflation
Inflation of main currencies, which we usually use for measuring value – the dollar and the euro, was considerable in the period 2004-2006. The currencies lost substantial part of their value, as measured in the main tradable industrial commodities.
What is important is that the global inflation could not fail to affect the Bulgarian open economy. Furthermore, the currency inflation, although in the beginning being implied mainly in higher price growth of metals and other industrial commodities, could not bypass the farm production. In the 12 months to August 2007 food commodities’ prices went up by around 30%, denominated in dollars. Price growth was slower, denominated in euro, but still it was faster than the public consensus, especially on ? background of the historic tendency toward deflation of agriculture prices due to rapid technology boom and sector productivity improvement.
The process of rising agriculture prices is global and has in its essence monetary nature (i.e. inflation of the main currencies), rather than being simply related to current supply shortage. These global arguments must explain larger part of the latest registered price growth in Bulgaria. This statement holds in case the agriculture market in Bulgaria is not burdened by new taxes, administrative expenses or trade limitations.
That is the reason why we do not expect to observe agriculture production prices going downward (under a scenario without any fundamental technological change), i.e. we expect the relative prices – prices of farm production, as measured in quantity of other goods, to head toward levels before 2004.
Different inflation for different consumers
The average annual inflation according to the Consumer Price Index (CPI) is 6.2% to August – lower than inflation in 2006 (7.3%), but still far beyond expectations of the government and independent macroeconomists in Bulgaria. The CPI is an “official” estimation of the cost of living, i.e. the change of household expenditure for one and the same quantity of goods and services. Because this is the “official” estimation of inflation for the average Bulgarian consumer, upon these digits are also based most of the requests of syndicates (and not only) for higher budget wages and higher social payments.
Inflation could differ considerably according to the structure of the consumer basket. This means that, from a statistical perspective, the methodology of NSI must be close to perfection for estimating the average cost of living, in order to serve as a foundation for policy decisions. If the statistics was not sufficiently fast in reflecting the ever changing consumer basket, the estimations obtained will not hold true.
If consumers increase the share of products, that become cheaper, in their basket, then inflation will be lower than estimated. But what is more important is that different models of consumer behavior are related to different consumer inflations.
The policy of state-determined income must take into account different CPI for different consumers. The recent data in fact supports the stronger pressure toward increasing state income, since people with lower income experience higher inflation. However, historically the trend is somewhat reverse.
Individual consumer choice has its importance
The individual consumer can influence his/her own inflation via changes in the structure of the consumer basket. The idea that the consumer is a helpless victim of the rising cost of living does not seem logic on the background of the changes in the consumer basket, which obviously follow shifts in relative prices. Consumers change the place of different products, not only substitutes, in their consumer priorities.
It is important to know that despite the average price growth of farm production, not all prices grow at equal pace. This allows for individual optimization in a moment of inflation as the current. In the long term the sufficiently significant differences might remind farmers that their individual decisions for investment allocation also matter.
Regional price differences also provide a good foundation for regional optimization. One and the same quantity of leva buys different consumption in different Bulgarian cities. Mobility can turn out helpful to the average Bulgarian in such moments, notwithstanding he/she is not used to it. Thus, mobility can replace the expectation of state interference in the free prices.
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