domingo, 18 de novembro de 2012

Inflation – “Meteo-sensing phenomena”?

We all feel in our own pockets the growth of prices in supermarkets, especially in food prices. Official documents confirm that because of the draught’s effects on foodstuff price, Romania’s inflation will increase by 5% by the end of the year. The same reason is invoked by the National Institute of Statistics ( NIS ). According to this institution, after a 1.8%  increase of prices in september (due to food price increase), annual rate of inflation reached its maximum point of this year, 5.33%. Should we consider that Romania’s inflation is a “meteo- sensing” fact?
In a market economy, goods and services price may change anytime. Some of them increase, while other decrease. We speak about inflation when a generalized increase of goods and services, not only an increase of specific articles, is registered. As a consequence, with one euro people can buy less, respectively, one euro values less than before. Some price variations are more important than others. To the average growth of the prices calculation, it is allocated a higher share to expensive products- like electricity- unlike cheaper products – like sugar or postal stamps.
Different people buy different products. Each household has its own consume habits: some of them own an automobile and consume meet, while others prefer exclusively public transport or vegetarian food. Average consumption of the households as a whole determine the share that different products and services have in the inflation measure. Some of the goods and services that are taken into account in the household consumption are daily articles (like food, newspapers, gas), long-term goods (like clothes, personal computers and washing machines), services (like insurances, house renting or hair dresser).
All goods and services consumed in households over the year are represented in a “basket” of items. Every product’s price in this “basket” may  vary from year to year. Annual rate of inflation is given by the whole basket price in a certain month, compared to his price in the same month of the last year.
First of all, it’s good to know that inflation’s problem is not a Romanian one. It’s a global one. According to International Monetary Fund ( IMF ) and World Bank, this year’s draught will determine a global food price increase . For the moment, there is no signs to predict a foodstuff crisis, like the one in 2008, but we need to be cautious. 
Beside prices increase, there are some other consequences of a high inflation rate. Volatile and unpredictable rates of inflation may harden long-term plans of  companies and consumers. This way, are discouraged the investments and economies and definitely we can talk about market inefficiency.  Another consequence of a high inflation or of an anticipation, is that people are less willing to save money for the future.  The reason could be that inflation may reduce, in time, the purchasing power of the economies. In this case, people that probably want to save money for future will rather spend this money in present.
A high inflation rate may lead to a quicker increase of a company costs considering the productivity profits, which makes the entrepreneurs to be more reticent about the risks, less willing to invest in the future. This thing has a huge impact on economic growth and on employment.
Many issues, no? 
The question is what power has a national bank to control the effects of this kind of “weather” fact?  Romanian National Bank remind us the factors that affected in the past the achieving of the purposed target. Because of unpredictable facts, like weather evolution, or because of our economy structure and perhaps because of the asymmetric way in which our economy responds to adverse shocks, annual rate of inflation had and may have deviations from the purposed target.
As an example, Romanian National Bank changed 1.9% increase in this year’s target, from 3.2% to 5.1%, in the same time increasing the annual rate of inflation for 2013, from 3% to 3.5%. “ In September 2012, food prices went up with 2.3% comparing to the previous month., and serviced prices with 0.4% ( National Institute of Statistics). Within food, the biggest increase in price is being the one for potatoes ( 27.4% ), groceries ( 9.85 % ), fruits ( 5.04%) and eggs ( 7.23% ), comparing to the previous month. In what concerns nonfood prices, the biggest increase in price is being for gas ( 2.83%) and for fuel (1.57%).
The inflation in the Euro Zone , recorded in September, was of 2.6% (annual rate) , the same level of that of August, according to Eurostat.  In monthly terms, the rate of inflation was of 0.7% in September 2012. In the EU, the annual rate of inflation was 2.7% in September, according to EU bureau of statistics. The lowest annual inflation rates were noticed in Greece ( 0.3% ), Sweden (1%) and Latvia (1.9%), and the highest were in Hungary (6.4%), Romania (5.4%) and Estonia (4.1%). The inflation rose in 11 member states, remained stable in 5 of them and decreased in 10 others, according to Eurostat.
                The main components of the highest monthly rates were clothing (14%), household equipment and education (0.5% each ), whilst the lowest monthly rates were noticed in leisure domains, culture, hotels and restaurants ( -1%) and communications (-0.5%)
The high, volatile rates of inflation are undermining the value of people’s revenue and can be of harm for the economic long term growth and for creating jobs. The low and stable rates of inflation are of common interest. That’s why inflation has to be handled. How is that possible? The 2 main ways of handling inflation are monetary and fiscal policies. Both policies influence the amount of money available in economy. Increasing the amount of money available in economy, people will tend to spend more, which will lead to an increase in the demand of goods and services. If the supply can’t keep up with the growth of the demand, the demand itself can generate an increase in the rate of inflation. Cutting down the availability of the currency has the opposite effect.
The basic rate of inflation has decreased considerably from 2000, as a result of the monetary policy, whilst the remaining component (administered prices, food prices, etc) remained relatively constant.  And if we take into account the fact that in the last years the share in the PPI basket (Power Purchasing Index) of the alimentary products was about 40% (almost double comparing to its value in the Euro Zone), then we can say that, indeed, the inflation in Romania is a meteo-sensing phenomena.
Alexandra Iftene

[artigo de opinião desenvolvido no âmbito da unidade curricular “Economia Portuguesa e Europeia” do 3º ano do curso de Economia (1º ciclo) da EEG/UMinho]

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