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Inflation in Bulgaria – rationale and impact mechanisms
submited on 30.08.2007 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
submited on 30.08.2007 in category Political stability | Fiscal affairs | Monetary policy | Regulated markets | Privatisation | Macroeconomic developments
Inflation of the dollar and the euro, after it has been for several years notable in rapid price growth of industrial commodities, reached agriculture production as well. In the last year food commodities’ prices increased by around 30%, denominated in dollars, and slightly slower, if denominated in euro. This might explain most of the reasons for the latest rise in the price of foods in Bulgaria.
Inflation of main currencies
In the last year metal prices picked up by around 55% in dollars, and gold – by 24%. Inflation of the American dollar was combined with devaluation, however slower, of the euro. This has been happening for several years, as the attention was attracted mainly to metal prices and other industrial commodities. Thus for example the copper prices went up three times in euro only in two and a half years.
„The soft” monetary policy led not only to currency devaluation, but also to change in relative prices. While metal prices picked up, agriculture production became cheaper. Measured in metals, farmers’ productivity and income drastically fell. Unless there is a certain technological change, which can dramatically lower farm production prices, we expect relative prices to gravitate toward levels before last three year’s inflation.
Relative prices in Bulgaria
Average wages in Bulgaria according to the official statistics went up by over 44% since 2003. Producer prices in agriculture picked up by 6.1% since 2000. The farmer’s production becomes cheaper, measured in labor units. The increase of the average material productivity will guarantee this in the future as well. However, this has nothing to do with nominal prices in agriculture, which depend also on inflation of the currency used for denomination.
In agriculture alone there are considerable changes in relative prices, i.e. some agriculture goods’ prices go up significantly faster than others.
Differences are sufficiently significant to provide incentives for farmers to change the way they are allocating their investments. It is obvious that poor harvest in a given sector (not only in one year, but systematically over years since 2000) provides opportunities for considerable profit making, if invested in technology, infrastructure or more qualitative operational maintenance of plantations.
Consumer prices
The average inflation according to CPI is 5.8% in the year to July – considerably lower than inflation in 2006 (7.3%). This is moreover a measure of the “rise in the cost of living”, i.e. change in household expenses for a specified quantity of goods and services. Food products have one third share in the consumer basket of NSI. Rising of some foods’ prices, even relatively fast could influence CPI, but by not much. For example, rising dairy products’ prices by 20% will increase CPI by around 0.6 percentage points.
However, there are also in the consumer basket goods, which become cheaper, while foods’ prices pick up. Such for example are the tobacco products after the liberalization of the trade in Bulgaria in 2007. Similar is the situation with some fuels. Prices of telecommunications have also moved slightly downward according to the official statistics.
There are several important aspects for the political interpretation of these processes. Firstly, Bulgaria is a part of the global market of commodities and agriculture production and it is not possible for local facts (including poor harvest) to solely explain change in prices. Secondly, government interference in price determination, including through export restrictions and “reserve” operations could have a strongly negative effect. Thirdly, impact on prices could be achieved through policy easing import in Bulgaria and indirect taxes reduction.
Inflation of main currencies
In the last year metal prices picked up by around 55% in dollars, and gold – by 24%. Inflation of the American dollar was combined with devaluation, however slower, of the euro. This has been happening for several years, as the attention was attracted mainly to metal prices and other industrial commodities. Thus for example the copper prices went up three times in euro only in two and a half years.
„The soft” monetary policy led not only to currency devaluation, but also to change in relative prices. While metal prices picked up, agriculture production became cheaper. Measured in metals, farmers’ productivity and income drastically fell. Unless there is a certain technological change, which can dramatically lower farm production prices, we expect relative prices to gravitate toward levels before last three year’s inflation.
Relative prices in Bulgaria
Average wages in Bulgaria according to the official statistics went up by over 44% since 2003. Producer prices in agriculture picked up by 6.1% since 2000. The farmer’s production becomes cheaper, measured in labor units. The increase of the average material productivity will guarantee this in the future as well. However, this has nothing to do with nominal prices in agriculture, which depend also on inflation of the currency used for denomination.
In agriculture alone there are considerable changes in relative prices, i.e. some agriculture goods’ prices go up significantly faster than others.
Differences are sufficiently significant to provide incentives for farmers to change the way they are allocating their investments. It is obvious that poor harvest in a given sector (not only in one year, but systematically over years since 2000) provides opportunities for considerable profit making, if invested in technology, infrastructure or more qualitative operational maintenance of plantations.
Consumer prices
The average inflation according to CPI is 5.8% in the year to July – considerably lower than inflation in 2006 (7.3%). This is moreover a measure of the “rise in the cost of living”, i.e. change in household expenses for a specified quantity of goods and services. Food products have one third share in the consumer basket of NSI. Rising of some foods’ prices, even relatively fast could influence CPI, but by not much. For example, rising dairy products’ prices by 20% will increase CPI by around 0.6 percentage points.
However, there are also in the consumer basket goods, which become cheaper, while foods’ prices pick up. Such for example are the tobacco products after the liberalization of the trade in Bulgaria in 2007. Similar is the situation with some fuels. Prices of telecommunications have also moved slightly downward according to the official statistics.
There are several important aspects for the political interpretation of these processes. Firstly, Bulgaria is a part of the global market of commodities and agriculture production and it is not possible for local facts (including poor harvest) to solely explain change in prices. Secondly, government interference in price determination, including through export restrictions and “reserve” operations could have a strongly negative effect. Thirdly, impact on prices could be achieved through policy easing import in Bulgaria and indirect taxes reduction.
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