THE LOOP OF INFLATION
Inflation hit 4.1% in the first three months of 2006 alone. That may turn out to be a serious stumbling stone in Bulgaria's road to the Eurozone. By definition this country should observe the inflation criterion for membership in the economic and single currency union in 2009. The Maastricht criteria oblige us to reach a high degree of price stability. It has been explicitly stated that the average annual inflation in the State should not exceed by more than 1.5% the inflation in the three EU members with the lowest inflation rate. At that, the price stability should be steady.
If that criterion was to be observed at present, the inflation in Bulgaria for 2005 had to be 2.6%, adding 1.5% to the indicators of the EU excellent performers.
the Euro low-inflation dogma
will be valid in about three years. However, two months ago the European Central Bank (ECB) President Jean-Claude Trichet warned government financiers to be careful with that indicator as it could turn out to be the main hindrance to Bulgaria's membership in the Eurozone. He even reproached us for last year's inflationary achievements. The reason is that in 2005 the budget was calculated at 3.6% inflation and afterwards the real rate turned out to be 6.5 per cent.
This year the gymnastics with the projected inflation seem to have greatly distorted the rulers' calculations. And what is worse, their mistakes in fact hit on the population's incomes. Because with the 4.1% appreciation of goods and services in the consumer basket since the beginning of 2006, the January 5% increase of pensions has been almost eaten up by now.
Promising to hold back the national currency's depreciation in the near Euro future the Government made a decision to introduce ahead of term high rates of excise duties on cigarettes and spirits. With the same explanation the 2006 budget was calculated at 4.9% inflation rate in the year-end. In mid-March however, a real drama occurred as it became clear that the inflation for February alone was 3 per cent. And the percentage for the first quarter of the year reached 3.8 per cent.
The main contribution to the record high inflation rate belongs to the expensive cigarettes, hiked by 64% and to the 3% increase of the prices of spirits. Sugar prices also added to the inflation rate. From November 2005 till February 2006 it was hiked by more than 58%, which reflected on domestic market prices. Moreover, mistakes regarding the distribution of quotas for import of cheap sugar with low customs duties became evident.
This was a record high
inflation rate for the last six years
- since August 2000, statisticians pointed out. Some weeks afterwards the Agency for Economic Analyses and Forecasts at the Finance Ministry announced a revised estimate of the annual inflation rate to 6 per cent.
According to an analysis of Bank Austria Creditanstalt, transport, healthcare, spirits and cigarettes, are among the goods and services which prices in Bulgaria have deviated most from those in Europe. That gives reason to make the conclusion that EU pre-accession harmonization of prices is the main cause of inflation in Bulgaria, the analysts say. They expect the average 2006 annual inflation rate to be 6 per cent. .
Some economists said that the excise duties inflation in the first months of 2006 is in fact a logical hook and an elementary way for the State to increase revenues to the Treasury, at that immediately. There are no guarantees at all that the inflation rate would be maintained at minimum levels, financier Emil Hursev commented. Once prices have been hiked they usually stay high.
According to Georgi Stoev from the analyses group Industry Watch, inflation in Bulgaria will exceed 6% this year. He recalled that new tariffs for water, electricity, central heating and natural gas are expected in the months to come. And Bulgaria is also dependent on imported inputs and raw materials, whose prices on foreign markets increase too.
The Institute for Market Economy projects 7.5% inflation in 2006. The experts pointed to the persisting growth of money supply, the high prices of fuels, and the increased excise duties on petrol, spirits and cigarettes as the main factors.
The hike of oil in the last two weeks reflected on the Bulgarian market of fuels. The most demanded А-95Н brand went up by BGN0.12-0.14/litre. Fuel prices account for the inflation rate. But they have an indirect effect as well. Transportation is one of the main components in the price formation of almost every commodity. Most producers won't be able to afford operating at a loss with the expensive fuels and will hike their prices. That will additionally raise inflation which might even reach 8-9% in the year-end.
That scenario depends mainly on oil prices. The question here is not if but how much they will go up.