Rapid Deflation Seen In Armenia In July

RAPID DEFLATION SEEN IN ARMENIA IN JULY
Venla Sipila

World Markets Research Centre
Aug 4 2009

According to the latest inflation data from the National Statistical
Service of Armenia, consumer prices in July fell by 2.7% month-on-month
(m/m) in July. This result compares to a more modest deflation rate
of 0.3% m/m seen in June, and to an inflation rate of 1.6% m/m posted
in May. As expected, the decrease in consumer prices was led by a
sharp fall in food costs, which eased by 5.7% from June. Conversely,
prices of non-food goods rose by 0.5% m/m and service charges inched
up by 0.1% m/m. Measured year-on-year (y/y), Armenian consumer prices
increased by 3.1% in July, after gaining 3.6% y/y in June, 3.4% y/y
in May and 3.1% y/y in May. The annual inflation rate for the whole
January-July period was reported at 2.7%, while consumer prices rose
by 2.4% in cumulative terms over the first seven months of 2009.

Significance:While the clear fall in prices in m/m terms is due
in large part to seasonal effects from food price developments,
the return to moderation in annual price growth is welcome. After
early 2009 saw inflation pressures subside sharply, they started
to strengthen again from March, after the devaluation of the dram
exchange rate seen earlier in the month, while the April jump in
inflation was mainly attributed to the increase in import prices
of Russian gas (seeArmenia: 1 May 2009:). With inflation below the
upper band of the target rate, the Central Bank of Armenia (CBA)
has enacted several interest rate cuts recently (seeArmenia: 8 July
2009:). The boosting impact on service prices form the gas price rise
is likely to keep having an upward effect on annual inflation in the
coming months, but the overall sharp cooling in economic activity
will have the opposite effect. Then again, the potential of sharp
renewed upward price pressures still cannot be written off, given the
vulnerability of the dram exchange rate amid Armenia’s high external
financing requirements.

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