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Sketch by Giorgi Magradze/ Caucasus Business Week

Annual Inflation Exceeds 7% – June Records Highest Inflation Since 2011

In june 2017 inflation rate marked -0.4% month on month and 7.1% year on year, while National Bank of Georgia has set annual target inflation rate at 4%. Despite slight contraction in general level of prices in June 2017, prices have risen anyway, as compared to the same period of 2016.

Georgia has not recorded higher than 7.1% inflation since August 2011.

In June 2017, major contraction in prices was recorded for vegetables, while a major rise in prices was registered for tobacco products.

Change in prices in the following groups have mainly determined a formation of inflation indicator:

Food and soft drinks: Prices declined by 1.5% in the group with -0.45% effect in total inflation indicator. Prices declined in the following subgroups: vegetable (-9%), milk, cheese and egg (-2.1%), oil and fat (-1.1%) and fruit and grapes (-0.9%).

Strong drinks, tobacco: prices in the group rose by 2.5%. Consequently, the group’s ratio in total inflation indicator marked 0.17%. Prices rose on strong drinks (1.3%) and tobacco products (3.6%).

As  noted above, the previous month recorded a downturn in prices, but  inflation rate rose anyway. As compared to the previous year, almost all products have risen in price, including vegetables, fruits, transport and healthcare services. Price changes in the following groups have made affect on shaping annual inflation:

Food and alcoholic beverages: Prices have increased by 9.5% with 2.87% ratio in total growth. Prices increased in the following subgroups: vegetables (33.7%), fruits and grapes (15.7%), milk, cheese and egg (11%), sugar, jam and other sweets (10.4%), coffee, tea and cocoa (5.3%).

Transport: prices rose by 15.3% with 1.92% ratio in inflation index growth. Prices increased on personal transport exploitation (21%), a purchase of transport (12.9%) and transport services (4.6%);

Alcoholic beverages, tobacco: price rose by 18.2% with 1.18% ratio in total index growth. Prices rose on tobacco products (36.8%) and alcoholic beverages (3%).

Healthcare: prices rose by 7.4% with 0.66% ratio in total index. Prices increased on medical products, equipment and devices  (21.3) and inpatient medical services (5.4%).

It should be noted that the monetary policy committee of National Bank of Georgia (NBG) took decision on June 14, 2017 on maintaining refinancing rate unchanged. As a result, today refinancing rate constitutes 7%. YTD, NBG tightened monetary policy by only 0.5%, despite the fact starting January 1, 2017 the excise tax rate rose on tobacco products and fuel. Consequently, NBG’s initial forecast increased inflation expectations. The next meeting of monetary policy committee will be held on July 26, 2017.

«As to inflation, NBG should pay due attention to this issue. We have problems in this direction. Therefore, attempts for curbing inflation should not harm economic growth. This is very difficult and in short-term and midterm perspective, NBG will have to take scrupulous decisions», Irakli Kovzanadze, head of finance-budgeting committee noted.

It is worth noting that excessive tightening of monetary policy may reduce inflation, but make credits more expensive and economic growth indicator may decline.

«If we excessively curb inflation, this signifies unemployment and imports will rise, domestic production will decline and more problems will arise in the future. It is wrong decision to cut expenditures through curbing revenues. In this specific case, upturn in prices are caused by one-time factors and excessive reaction from NBG will be incorrect decision. Raising excise tax rate and petrol prices on global market preconditioned temporary  declination of the inflation indicator, but it has not provoked inflation processes.

This signifies NBG reacts to inflation processes and we are to prevent these processes, as well as inflation tendencies. Therefore, in midterm period  inflation should be close to 4%, while the index should be reduced to 3% in 2018», NBG vice president Archil Mestvirishvili said.

As to economic growth, this year Government plans it at 4%, however, our economy is demonstrating better indicators. In May 2017, as compared to May 2016, state economy grew to 5.3%, while averaged real growth in January to May 2017 marked 4.5%. Consequently, NBG should carry out very cautious and reasonable monetary policy to maintain general growth in prices within target inflation rate (4%).

At the same time, tightened approaches should not harm economic growth pace. This year we have recorded the best indicators over the past 3 years in terms of GDP growth. Therefore, government’s fiscal policy and NBG money-credit policy is to maintain this indicator and further increase it.