“To say that we have not too high inflation rate is almost the same as to say that somebody is a little pregnant,” once said the 32nd president of the US Franklin Roosevelt. Economists don’t share this opinion. Even more, they are sure that a modest inflation rate is good and healthy for economy and is a normal process. However, there are more reasons to worry about reduction of prices than inflation itself.
Government policy tends to keep the changes of prices under control and are entrusting this responsibility to the Central Bank. The CB not only regulates the prices through a monetary policy but also forecasts and writes the target average inflation rate in the budget of the next year. Of course inflation does not always stay in the frames of the forecast limits. Last year the inflation high rate in Armenia is a good example of this point.
The inflation in December 2010 compared to the same month in the previous year reached 9.4%. Was it predictable for the CB? Based on the CB’s project on the monetary policy for the first quarter 2011 we may assume that it was not. “In 2010 the financial and monetary sector of Armenia was characterized with high level of inflation because the results of the financial and monetary policy of 2009 started to be seen in the end of 2009 and it was expected that it would reach the highest point in the end of 2010,” writes the document. The strange thing is that by expecting a high level of inflation they decided to set the inflation average target rate at 5.5% for 2010.
According to the CB, last year a number of factors resulted in the inflation rate growth. We discussed the first factor above (budget tax and monetary policy).The second factor resulting in inflation is the growth of prices for consumer products and raw materials in the world market in the period of recovery after the crisis, “which was expected to have the biggest impact on the Armenian economy in the first quarter of 2010.” The third factor is the growth of the prices for gas and water since April 1, 2010.
What shall we expect for this year? According to the CB, in the external market the prices of oil products, production materials and metals will grow. The price of grain will grow spontaneously. The CB also forecasts growth of the price of sugar to be conditioned by the high level of demand in the world. The CB informs that in the conditions of economic growth in 2011 there will be inflation in the markets of the main products and will keep the high prices at the same high levels.
As for the influence of the domestic demand on the inflation, the CB expects that the private consumption will grow by 6% to be conditioned by the growth of the private controlled incomes due to the real growth of GDP and money transfers from abroad.
Generally in consideration of both the external and domestic factors the CB expects that during the first half of the year the high inflation rate will stay at the same level as the average rate of inflation during the first half of the year will be at 9.5%. The experts of the bank say that among the factors are the agricultural products supply shocks in the beginning of the year, the growth of agricultural prices as well as products in the international market. The authors of the report tried to conclude the report with a positive statement and wrote the following: “Starting from the third quarter as a result of the slowdown of the mentioned shock conditions the inflation rate will slowly go down and in the end of the year the average inflation rate will be approximately 5.3%. However it is still higher than the planned average target rate of inflation.” But the CB has tried to secure themselves and wrote that in the current non-stabile conditions the possibility of straying from the planned average inflation rate is high. In other words, if the inflation rate approaches the double-digit rate again, nobody will be able to accuse the CB for wrong predictions.
Unfortunately the inflation rate for January does not allow to have “optimistic expectations”. The consumer prices have grown by 2.8% in a month (In January of this year compared to December 2010). This is the highest rate during the past five years: in January 2010 the consumer price index was 1.7, in 2009 – 1.2, in 2008 and 2007 – 2.4, in 2006 – 2.5. In such conditions if it does on this way, hardly the inflation rate level may be in the limits predicted by the CB. Besides that in our country it is the CB’s responsibility to control the inflation rate, but the changes of the prices are also partly conditioned by competition problems. In other words, we cannot have big expectations from the CB. The CB has secured itself from any possible developments. In consideration of the fact that one of the reasons of the high level of migration is also the high inflation rate of these years, the title of the CB’s document may be changed and named as a call for the people who want to immigrate: “Do not blame the CB before leaving…”
Anyway we should not forget the first rule of inflation: if everybody believes the prices will grow, it means that the prices will grow. It is a joke, but it is true.