Inflation seen under control in 2005, despite higher oil prices

Although the world price of oil remains an unpredictable factor for inflation, the employer-sponsored Foundation for Economic and Industrial Research (IOBE) forecasts that the pace of price rises this year will slow down by about 0.4 percent to 3.5 percent. According to an IOBE study, Greece’s 2005 inflation rate will largely depend on the extent to which firms will absorb the value-added tax hike from 18 to 19 percent as of April 1 and the increases in the price of oil. So far, these two cost items have been passed on to the consumer only to a limited extent and this partly explains why inflation has not shot up. But, IOBE warns, this process has still not been completed and may create inflationary pressures in coming months. The recent strengthening of the US dollar against the euro has added to inflationary pressures, given that oil is traded in dollars. On the other hand, the rise in labor costs is expected to slow down this year, compared to 2004, due to limited pay raises in the public sector, and labor productivity is forecast to continue improving at a steady pace, which both should dampen inflation. IOBE also says that an added positive impact is expected from a projected slowdown in inflation in Greece’s main suppliers. Excess domestic demand is forecast to lose steam mainly as a result of a decline in investment. A potentially crucial parameter remains the possibility of the imposition of new indirect taxes in the fall should progress in reducing public debt not be deemed satisfactory. According to the most recent projections, the average inflation rate in the eurozone in 2005 will be around 2 percent, with core inflation perhaps even below that. This may allow the European Central Bank to conclude that there is no serious danger of a steep rise in inflation and proceed to reduce interest rates in a small measure to bolster growth. IOBE said in another study that businesspeople on the whole expected the government’s new development incentives law to have a positive influence on their investment activity in 2005.