- Political stability
- Fiscal affairs
- Monetary policy
- Regulated markets
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- Macroeconomic developments
Could the government control inflation
submited on 14.12.2007 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
submited on 14.12.2007 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
We must start with the clarification that by inflation the broad public understands the change in the consumer prices index (CPI). In this frame the monetary policy, creating money supply, is only one of the factors, having influence over prices (i.e. inflation, as perceived that way).
So, why this year the NSI registered high inflation, i.e. price growth, exceeding the one in the Euro area and most countries in the region? And furthermore, what could be the government reaction?
In first place, the consumer basket here includes considerably larger share of foods and other basic commodities. This is so because, generally said, Bulgarians are poor, and poor consumers could afford meeting only the basic necessities. This means that prices of foods, fuels and transport are of great importance. What is more, relatively cheap products (bread, milk and so on) dominate the group of foods. When the global market conjuncture changes toward higher prices of agriculture products and energy resources, what indeed happened in 2007, this reflects to much larger extent on those, consuming this “poor” basket.
The second thing that has to be taken into account is the pressure put on the business toward higher investment expenditure in recent years due to the introduction of European (higher) standards. Until 2006 on the market operated both firms, which met fully the new standards, and those, which produced without implementing any innovations, and thus competition was stronger, from 2007 on, only the ones which have invested were present on the market. And this means, at least in the short term, higher production costs, mostly in the food and beverages production. And again the consumer basket, comprising mainly of foods, led to stronger (than the one in other countries) effect in the aggregate price index.
However, it is of equal importance to answer the question why such a price growth (12.6% on annual basis) must concern us. The formal reason is that impedes the entry of Bulgaria in the Euro area. But apart from this, could we expect anything else? In 1998, the first year after the introduction of the currency board, the price level in Bulgaria was around 3.3 times lower than the one in the EU (then the 15 old members). In the same time in Hungary prices were about 1.6 times lower. In other words, due to incorrect macroeconomic policy and decelerated reforms people became poor in 1997, so much that in nominal terms it was to cheap in Bulgaria – one euro (then Deutsche mark) could purchase many more local goods and services, rather than in other countries. It is important to understand that this huge difference in price levels was not attributable to some higher efficiency of Bulgarian producers then. Hence, to thinking macroeconomists back then it was clear that with successful economic policy, resulting in growth, domestic prices will begin to grow faster. Price stability in the long-term plan would mean slower integration of the Bulgarian economy in the global markets and the related to it persisting poverty.
The other thing we must consider is that consumer prices increase considerably slower than asset prices – financial and real. Both Bulgarian stocks and real estate prices have gone up several times more than even bread and fuels.
In this situation somewhat strange seem the recommendations of international analysts for the government to make and apply strategy for moderating inflation. In reality under the conventional understanding in recent years the government makes anti-inflationary policy – via generating budget surplus. The central bank on its account introduced several times restrictions of the credit expansion. In the same time the economy works in fact in a state of one-side euroisation due to the currency board – so that any pro-inflationary policies, devaluating the local currency, are missing (as compared to Hungary and Romania).
The private sector however could make important conclusions. The first one is that the economy is to such an extent integrated into external markets, that any change in main prices is transferred almost immediately. This would mean also the reversed tendency – when for example crop prices fell in the following years. In second place, the time of competitiveness, based on low labor costs, is already gone. The companies will have to keep up with European standards – equally with their competition in other countries - and will gradually tend to pay more for labor. In fact average wages have gone up by more than 20% in a year.
So, why this year the NSI registered high inflation, i.e. price growth, exceeding the one in the Euro area and most countries in the region? And furthermore, what could be the government reaction?
In first place, the consumer basket here includes considerably larger share of foods and other basic commodities. This is so because, generally said, Bulgarians are poor, and poor consumers could afford meeting only the basic necessities. This means that prices of foods, fuels and transport are of great importance. What is more, relatively cheap products (bread, milk and so on) dominate the group of foods. When the global market conjuncture changes toward higher prices of agriculture products and energy resources, what indeed happened in 2007, this reflects to much larger extent on those, consuming this “poor” basket.
The second thing that has to be taken into account is the pressure put on the business toward higher investment expenditure in recent years due to the introduction of European (higher) standards. Until 2006 on the market operated both firms, which met fully the new standards, and those, which produced without implementing any innovations, and thus competition was stronger, from 2007 on, only the ones which have invested were present on the market. And this means, at least in the short term, higher production costs, mostly in the food and beverages production. And again the consumer basket, comprising mainly of foods, led to stronger (than the one in other countries) effect in the aggregate price index.
However, it is of equal importance to answer the question why such a price growth (12.6% on annual basis) must concern us. The formal reason is that impedes the entry of Bulgaria in the Euro area. But apart from this, could we expect anything else? In 1998, the first year after the introduction of the currency board, the price level in Bulgaria was around 3.3 times lower than the one in the EU (then the 15 old members). In the same time in Hungary prices were about 1.6 times lower. In other words, due to incorrect macroeconomic policy and decelerated reforms people became poor in 1997, so much that in nominal terms it was to cheap in Bulgaria – one euro (then Deutsche mark) could purchase many more local goods and services, rather than in other countries. It is important to understand that this huge difference in price levels was not attributable to some higher efficiency of Bulgarian producers then. Hence, to thinking macroeconomists back then it was clear that with successful economic policy, resulting in growth, domestic prices will begin to grow faster. Price stability in the long-term plan would mean slower integration of the Bulgarian economy in the global markets and the related to it persisting poverty.
The other thing we must consider is that consumer prices increase considerably slower than asset prices – financial and real. Both Bulgarian stocks and real estate prices have gone up several times more than even bread and fuels.
In this situation somewhat strange seem the recommendations of international analysts for the government to make and apply strategy for moderating inflation. In reality under the conventional understanding in recent years the government makes anti-inflationary policy – via generating budget surplus. The central bank on its account introduced several times restrictions of the credit expansion. In the same time the economy works in fact in a state of one-side euroisation due to the currency board – so that any pro-inflationary policies, devaluating the local currency, are missing (as compared to Hungary and Romania).
The private sector however could make important conclusions. The first one is that the economy is to such an extent integrated into external markets, that any change in main prices is transferred almost immediately. This would mean also the reversed tendency – when for example crop prices fell in the following years. In second place, the time of competitiveness, based on low labor costs, is already gone. The companies will have to keep up with European standards – equally with their competition in other countries - and will gradually tend to pay more for labor. In fact average wages have gone up by more than 20% in a year.
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