Inflation jumps to 13-year high
Greece’s inflation rate accelerated to a 13-year high in July after taxes on fuel, alcohol and tobacco were raised to help reduce Greece’s massive budget deficit. The Hellenic Statistical Authority (ELSTAT) said yesterday higher energy prices and a value-added tax increase as of July 1 pushed consumer price inflation to 5.5 percent, its highest level since August 1997 and far outstripping the rest of the eurozone. Greek inflation stood at 5.2 percent in June of this year and at 0.6 percent in July 2009. Increases in value-added, fuel and tobacco taxes have pushed inflation much higher than expected, with many businesses passing tax increases on to customers due to lack of market competition. The European Commission and International Monetary Fund raised their 2010 inflation forecast for Greece to 4.75 percent from 1.9 percent earlier this week, while applauding the country’s efforts to exit its debt crisis and endorsing the next payment in the bailout scheme. Greek prices are rising at a much faster pace than in the rest of the eurozone, eroding household incomes and the international competitiveness of businesses. Eurozone inflation inched up to 1.7 percent in July from 1.4 percent in June. Still, the July reading was lower than some analysts expected. «I expected inflation to reach 6 percent in July but price increases were relatively restrained in services,» Nikos Magginas, an economist at the National Bank of Greece, told Reuters. The EU and IMF expect inflation to even out to between 1.5 and 2 percent next year, given a 14 percent salary cut in the public sector and a 2010 wage freeze in private enterprises. While higher inflation will hit private consumption and the country’s competitiveness, it may help to boost nominal gross domestic product and thus make it easier for the government to cut its deficit-to-GDP ratio. Economists estimate that an average inflation rate of 4.7 percent for the year could reduce the deficit-to-GDP rate by 0.2 percentage points. Higher inflation is more useful to Greece than lower inflation, David Mackie, chief European economist at JPMorgan Chase in London, said in a note to investors, Bloomberg reported. While lower inflation would help competitiveness, faster price growth would help debt sustainability, which is more important for the country, according to the note.
