Dimitri Kumsishvili: “The rate of inflation marginally exceeds the targeted figure.”

Dimitri Kumsishvili: “The rate of inflation marginally exceeds the targeted figure.”

Dimitri Kumsishvili: “The rate of inflation marginally exceeds the targeted figure.”

The FINANCIAL -- The former Minister of Finance, Dimitri Kumsishvili, stated: “The rate of inflation in October is 6.4% which only marginally exceeds the National Bank’s targeted figure… For the last few months, the base inflation rate has been stable and close to the targeted figure.”

FactCheck took interest in the accuracy of the statement.

Generally, economic theory embraces the idea that both high and zero inflation, as well as deflation (a drop in price levels), are detrimental for an economy. The optimal targeted rate of inflation in developed countries is 1%-2% whilst in developed countries – 2%-4%. The National Bank of Georgia has determined the targeted inflation rate at 4% for Georgia in 2017.

Since the beginning of 2017, inflation has been kept above the targeted level. The tendency of growth has persisted during the first two quarters and the annual inflation rate in June reached 7.1%. The trend of decrease started in July-August and the rate of inflation dropped to 5.7%. In October, the inflation increased by 0.8% as compared to the previous month whilst the annual inflation rate grew to 6.4%.

This year, the increase in prices was largely stipulated by the significant increase in the prices of commodities such as food and non-alcoholic beverages as well as alcoholic beverages, tobacco, transport and healthcare (see Table 1).

In regard to the base inflation rate, this indicator is used to assess the basic tendency of inflation alone and does not include the seasonal component and products with the most fluctuating prices such as food and non-alcoholic beverages, energy products, administered tariffs and transportation (tariffs). Therefore, a comparison of the base inflation rate and the targeted rate of annual inflation is groundless. For the last few months, the base inflation rate has been fluctuating between 4.3% and 4.5% whilst in October it was 4.4%.

As illustrated by the table, the growth of the inflation rate is caused mostly by the increase of prices on goods subject to excise tax. Therefore, one of the major factors behind inflation is the increased excise tax beginning from 1 January 2017 together with growing oil prices on the world market. In regard to increased prices on food, the National Bank of Georgia’s position is that we have to take into account the fact that prices for fruit and vegetables were considerably low in 2016 whilst the price of sugar on the world market is high. At the same time, the supply of meat on the local market could have been reduced because of the increase in the export of livestock.

The growth of inflation is especially visible on imported goods. As of September, the growth of prices on imported goods constituted 10.4% whilst this figure is comparably lower (4.8%) for locally produced goods.

The impact of one-off factors (growth of excise tax) upon annual inflation is quite high whilst the base inflation rate is kept at a relatively low level. Therefore, other things being equal, there is no ground to assume that the tendency of price hikes will continue. The National Bank of Georgia prognosticates that as the effect caused by the one-off factors fades, the level of inflation will align with the targeted figure.

Conclusion

As of October 2017, the annual inflation rate in Georgia was 6.4% which markedly exceeds the targeted figure (4%) determined by the National Bank of Georgia. The 2.4% excess is quite high and it is inappropriate to say that it is only marginally high. In fact, we have a situation when the rate of inflation is 60% higher as compared to the targeted figure.

This is largely caused by the impact of one-off factors. Specifically, one of the principal reasons behind high level of inflation is the growth of the excise tax, particularly on fuel. This was done by the Ministry of Finance itself.

The sole function of calculating the base inflation rate is to assess the basic dynamic of inflation and its comparison to the targeted figure of annual inflation is groundless.

FactCheck concludes that Dimitri Kumsishvili’s statement is HALF TRUE.