The majority of European Union (EU) countries may have to worry about weak economic growth or even recession, but that is not the case for Greece. Contrary to this, many analysts think the country’s biggest macroeconomic headache is inflation because it erodes competitiveness and undermines future economic growth. Although it is hard to argue against a case for lower inflation, the link between inflation and competitiveness may be looser than they think. Greece’s headline consumer price inflation fell sharply, to 2.8 percent year-on-year in October from 3.6 percent in September, thanks to lower fuel prices and favorable base effects. However, core inflation, a better measure of underlying inflation trends, which does not include volatile fuel and fresh produce prices, eased slightly to 3.7 percent in October from 3.8 percent in September, remaining stubbornly high, according to Platon Monokroussos, head of economic research at EFG Eurobank Ergasias. At the same time, Greece’s GDP (gross domestic product) is expected to grow by approximately 4.0 percent or 4.1 percent this year, according to Finance Minister Nikos Christodoulakis – much lower than July’s revised 4.6 percent and the initial government estimate of 5 percent. Deteriorating global economic growth prospects seem to have had an effect but even at 4 percent, Greece’s economic growth is much higher that the EMU average, expected to be between 1.3 percent and 2 percent this year. The combination of relatively high GDP growth and high inflation rates comes as no surprise to the analysts who closely follow the country’s economy. Most had forecast this development long before Greece became a member of the eurozone at the beginning of 2001. The spike in oil prices and the euro’s slide against the dollar helped accentuate the inflation problem, since domestic oil prices proved more sensitive to rising international oil prices than in other EU oil-importing countries. At the same time, the fight against inflation got little support from limited progress in economic structural reforms, including privatizations and the liberalization of key output and input markets. Although nobody disputes the fact that Greece has to do more to bring inflation down – closer to the 2-percent level or less associated with price stability – the link between higher Greek inflation compared to EU average and erosion of economic competitiveness may not be as strong as some think it is for the following reason: Greece may be a small, relatively open economy but the non-tradable sector is sizable. Into this so-called non-tradable sector fall many goods and services which are little affected by international competition, therefore their prices are set by domestic demand and supply forces. Well-known professions such electricians, barbers, plumbers and others fall within this category. As one may expect, the inflation of non-tradable goods and services is much higher than inflation in the tradable sector, where prices are influenced much more by foreign competition. Although wages in the two sectors may not differ much, due to collective bargaining practices, productivity in the tradable sector is much higher than in the non-tradable sector, therefore producing lower unit labor costs. The national inflation rate is determined both by the prices of goods and services from the tradable and non-tradable sectors. Since inflation in the non-tradable sector is almost double that of the tradable sector, it appears that Greek headline inflation is much higher than that of many other EU countries, eroding economic competitiveness. However, this may not be the case if headline inflation is adjusted for higher inflation in the non-tradable sector. In that case, the inflation differential between Greece and other EU countries shrinks, making the inflation/competitiveness argument less convincing. This is not to say Greece has to relax efforts to fight inflation. It rather argues for accelerating the pace of economic reforms, including lifting the barriers to entrance in certain professions and truly liberalizing some product markets, to increase productivity in the non-tradable goods and services and close the inflation gap that separates Greece from other EU countries. These steps, if taken, will also boost the economy’s long-term potential and lead to a more favorable trade-off between inflation and unemployment. Greece has to do its best to combat inflation but higher inflation vis-a-vis our EU partners does not translate automatically into a loss of competitiveness.