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Lower inflation in 2014

Mar 23,2014 - Last updated at Mar 23,2014

Last week, the Department of Statistics, issued its monthly report on consumer prices for February. Local newspapers published the results under the title “Inflation rose by 3.2 per cent in two months”.

Had it been true that inflation rose by 3.2 per cent in two months, as the press indicated, the inflation rate by the end of the year may reach 19 per cent or more.

As a matter of fact, the inflation rate during the first two months of 2014 declined to 3.2 per cent, down from last year’s rate of 5.6 per cent.

The cost of living index by the end of last year stood at 146.2 (2006=100). It rose during the first two months to 146.9. The rise did not exceed 0.7 points or slightly less than 0.5 per cent, an annualised rate of less than 3 per cent.

The rate quoted in the press, i.e., 3.2 per cent, was based on gross misunderstanding; it does not represent the inflation rate in the first two months of the year, but the inflation rate over 12 months, starting with March 2013 and ending with February 2014.

By the way, the rate 3.2 per cent happens to be the predicted rate of inflation for 2014 as a whole. 

Inflation is not on the rise, as suggested by the wrong story in the press, on the contrary it is declining to a level lower than the ones experienced during the past several years, when it was hovering above 5 per cent.

It may be true that hiking the prices of oil derivatives was responsible for 2.5 percentage points of inflation in 2013, out of 5.6 per cent, as attributed to a recent report issued by the Central Bank.

This important factor will not be repeated in 2014. The effect of raising fuel prices happens once. There is no reason to believe that fuel prices this year will rise once more.

The inflation rate is one of the most important economic indicators.

It is taken into account when deciding the annual increments of salaries and wages of civil servants, as well as private sector workers, in order to protect the standard of living of staffers. At a minimum, the percentage of annual increments should not be lower than the inflation rate.

The inflation rate is also instrumental in influencing interest rates payable on deposits, or charged to borrowers.

Barring exceptional circumstances, inflation rates and interest rates move in the same direction.

The interest rate payable on deposits should by no means be lower than the inflation rate, while interest charged to borrowers is higher because it takes into account the element of risk, which, of course, varies from one borrower to another.

It should be mentioned, in this respect, that most economists consider 3 per cent as an ideal rate of inflation that should be targeted by economic and monetary policies.

Monetary authorities should step in and activate their instruments if and when the rate of inflation becomes much higher or lower than this ideal rate.

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