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ARMENIAN CONSUMER PRICE INFLATION RISES SHARPLY TO 9.3% IN AUGUST DESPITE INTEREST RATE RISE
by: Lilit Gevorgyan
IHS Global Insight
September 5, 2013
An energy price increase in July was the main trigger for the inflation
spike in Armenian consumer prices in August, with the annual rate of
change in food and utilities reaching double digits.
Nearing double-digit inflation mark
Armenian consumer price inflation rose sharply in August to a year-high
of 9.3%, as a result of strong inflationary pressures from food and
services prices, according to the Armenian Statistics Office.
The annual rate of change in consumer price index (CPI) in August
was up compared to year-on-year (y/y) gains of 8.5% in July, 6.5% in
June and 5.2% in May. However, in a month-on-month (m/m) comparison,
consumer prices rose at a slower rate in August, up by 0.3%, compared
to a 0.4% m/m gain in July and a 0.1% m/m decline in June.
The breakdown of the consumer price index in August revealed that the
strongest inflationary impulse came from services sector, largely as
a result of increase in energy prices that came into effect in July
2013. The cost of services, the second largest component of CPI after
consumer goods, rose to 11.2% y/y in August, up from a y/y gain of
8.4% in July. The services sector, according to the methodology of
the Armenian Statistics Office, includes housing, utilities, energy as
well as transport and communication. The double-digit increase in food
prices was another strong contributor of August inflation. Food prices
were up by 10% y/y, slightly decelerating from 10.3% y/y increase in
July. Alcoholic beverages and tobacco prices also rose by 5.9% y/y in
August, only marginally faster compared to 5.8% y/y increase in July.
Main culprit
The Armenian authorities have been successful in keeping the inflation
rate below the target range with a 4% mid-point throughout 2012. This
was mainly due to suppressed import prices, as well as good harvests
ensuring food prices, which have a significant weight in the overall
consumer goods and services basket, increased only moderately.
However, in April ArmRusgazard, Armenia's national energy distributor,
which is 80% controlled by the Russian gas monopoly Gazprom,
applied to the Public Services Regulatory Commission to increase
gas tariffs by 50%. This eventually led to an 18% increase of
domestic retail gas prices, effective from July 2013. Aware of the
negative consequences of the dramatic gas price increase on Armenian
consumers, the government decided to subsidise 30% of the gas prices
for low-income households. However, this undertaking is going to
put further pressure on the government finances and increase the
possibility of the government missing its budget deficit target in
2013, which are projected by to stand at 2.6% of GDP.
Outlook and implications
Despite the Armenian Central Bank's (CBA) decision to increase its
refinancing rate by 50 basis points to 8.5% in August, both food
and services prices continued to rise at alarming rate, prompting it
to revise its inflation forecast for the next 12 months. Armenia's
monetary regulator now expects consumer prices to rise by 8.5% y/y in
the third quarter of 2013, while the year-end inflation is projected
to stand at 7.5-9.0%. Meanwhile the government projects that the
annual inflation to stand at 4%, which is below our projection of 4.6%
for 2013 as a whole, according to our August forecast.
The CBA's decision to increase its lending rate has yet to take an
effect, although the impact of the rate increase could be limited
given the poor transmission channels in Armenia's still developing
banking system. We believe that two major factors, high energy
prices and poor harvests, are expected to keep Armenia's consumer
prices elevated in the coming months. Meanwhile CBA will become under
increasing pressure to maintain its goal of keeping inflation within
a band with 4% mid-point and plus or minus 1.5% fluctuation. This
is because the food products make the largest part of the Armenian
consumer products basket and poor harvests as a result of bad weather
in early 2013 will add to inflationary pressures. In addition, the
demand for energy is inelastic, hence likely to engender further rise
in consumer price index in the coming months. However, with Armenia
now intending to join the Russian-led Customs Union, Russia's Gazprom
may offer Yerevan a discount in gas prices, as already hinted in the
recent bilateral presidential level talks between the two countries.
Should the gas price discount materialise, this should ease
inflationary pressures on Armenian consumer prices.
by: Lilit Gevorgyan
IHS Global Insight
September 5, 2013
An energy price increase in July was the main trigger for the inflation
spike in Armenian consumer prices in August, with the annual rate of
change in food and utilities reaching double digits.
Nearing double-digit inflation mark
Armenian consumer price inflation rose sharply in August to a year-high
of 9.3%, as a result of strong inflationary pressures from food and
services prices, according to the Armenian Statistics Office.
The annual rate of change in consumer price index (CPI) in August
was up compared to year-on-year (y/y) gains of 8.5% in July, 6.5% in
June and 5.2% in May. However, in a month-on-month (m/m) comparison,
consumer prices rose at a slower rate in August, up by 0.3%, compared
to a 0.4% m/m gain in July and a 0.1% m/m decline in June.
The breakdown of the consumer price index in August revealed that the
strongest inflationary impulse came from services sector, largely as
a result of increase in energy prices that came into effect in July
2013. The cost of services, the second largest component of CPI after
consumer goods, rose to 11.2% y/y in August, up from a y/y gain of
8.4% in July. The services sector, according to the methodology of
the Armenian Statistics Office, includes housing, utilities, energy as
well as transport and communication. The double-digit increase in food
prices was another strong contributor of August inflation. Food prices
were up by 10% y/y, slightly decelerating from 10.3% y/y increase in
July. Alcoholic beverages and tobacco prices also rose by 5.9% y/y in
August, only marginally faster compared to 5.8% y/y increase in July.
Main culprit
The Armenian authorities have been successful in keeping the inflation
rate below the target range with a 4% mid-point throughout 2012. This
was mainly due to suppressed import prices, as well as good harvests
ensuring food prices, which have a significant weight in the overall
consumer goods and services basket, increased only moderately.
However, in April ArmRusgazard, Armenia's national energy distributor,
which is 80% controlled by the Russian gas monopoly Gazprom,
applied to the Public Services Regulatory Commission to increase
gas tariffs by 50%. This eventually led to an 18% increase of
domestic retail gas prices, effective from July 2013. Aware of the
negative consequences of the dramatic gas price increase on Armenian
consumers, the government decided to subsidise 30% of the gas prices
for low-income households. However, this undertaking is going to
put further pressure on the government finances and increase the
possibility of the government missing its budget deficit target in
2013, which are projected by to stand at 2.6% of GDP.
Outlook and implications
Despite the Armenian Central Bank's (CBA) decision to increase its
refinancing rate by 50 basis points to 8.5% in August, both food
and services prices continued to rise at alarming rate, prompting it
to revise its inflation forecast for the next 12 months. Armenia's
monetary regulator now expects consumer prices to rise by 8.5% y/y in
the third quarter of 2013, while the year-end inflation is projected
to stand at 7.5-9.0%. Meanwhile the government projects that the
annual inflation to stand at 4%, which is below our projection of 4.6%
for 2013 as a whole, according to our August forecast.
The CBA's decision to increase its lending rate has yet to take an
effect, although the impact of the rate increase could be limited
given the poor transmission channels in Armenia's still developing
banking system. We believe that two major factors, high energy
prices and poor harvests, are expected to keep Armenia's consumer
prices elevated in the coming months. Meanwhile CBA will become under
increasing pressure to maintain its goal of keeping inflation within
a band with 4% mid-point and plus or minus 1.5% fluctuation. This
is because the food products make the largest part of the Armenian
consumer products basket and poor harvests as a result of bad weather
in early 2013 will add to inflationary pressures. In addition, the
demand for energy is inelastic, hence likely to engender further rise
in consumer price index in the coming months. However, with Armenia
now intending to join the Russian-led Customs Union, Russia's Gazprom
may offer Yerevan a discount in gas prices, as already hinted in the
recent bilateral presidential level talks between the two countries.
Should the gas price discount materialise, this should ease
inflationary pressures on Armenian consumer prices.