Latest INSTAT data show inflation rate in Feb. 2012 dropped to 0.6 percent, standing far below the central bank’s target of 3 percent which has been set as the ideal rate positively contributing to the country’s economy’s growth
TIRANA, March 6 – With inflation rates during the first two months of this year at a record low in the past decade, Albania is heading into a deflation unveiling the wounds of the Albanian economy as consumer demand remains low and the economy fails to recover. Latest INSTAT data show inflation rate in Feb. 2012 dropped to 0.6 percent, standing far below the central bank’s target of 3 percent which has been set as the ideal rate positively contributing to the country’s economy’s growth. The inflation rate standing at below 2 percent for the third month in row, (Last December and January it was at 1.7 and 1.6 percent respectively) signals a drop in domestic consumption for Albania, a net importer, despite global food prices on a downward trend, and harsh times for the Albanian economy in 2012 as the Eurozone is expected to plunge into mild recession. “Research has indicated that inflation has a statistical trend of registering positive values. In reality, the target of preserving an unchanged price level, i.e an inflation rate close to zero could correspond to a deflationary situation,” says the Bank of Albania in its 2012-2014 monetary policy document.
The Bank of Albania estimates that by preserving the inflation rate around the 3 percent rate, the monetary policy will continue having positive contribution to the development of the Albanian economy. “This targeted inflation rate and the monetary policy applied for its achievement, positively affects the stability of economic growth rates, as has been proved in recent years,” says the central bank.
Back in Feb. 2011 inflation rate hit a record high of 4.5 percent and came on a downward trend only in June 2011 when it dropped to 3.9 percent, 0.1 percentage points below the central bank’s 3ѱtarget band.
INSTAT data show food and non-alcoholic drinks prices, which is the key component in measuring the consumer price index, dropped by 1.2 percent y-o-y in Feb. 2012, registering an unusual negative rate for the beginning of the year since 2005. INSTAT reports a 1.4 percent drop in food prices and a 21 percent decrease in “vegetable including potatoes” group.
Clothes and footwear products were down 2.3 percent y-o-y.
The “rent, water, combustible material, energy” index registered a 1.3 percent with water supply fees up by 13.9 percent because of new increased tariffs entering into force.
Fuel prices continued their upward trend with diesel prices up 1.7 percent and petrol up 1.9 percent compared to Jan. 2011.
Based on calculations from INSTAT data, the 1.7 percent inflation rate registered in Dec. 2011 takes annual inflation rate for 2011 at 3.45 percent, down from 3.6 percent in 2010.
Inflation rate during the second half of 2011 remained at an average of 3 percent meeting the Bank of Albania’s 3ѱtarget band. However, during the first half of 2011 inflation was at an average of 4.05 exceeding the central bank’s target by 0.05 percent, a situation which forced the Bank of Albania to raise the key interest rate to 5.25 percent in order to reduce inflation pressures.
Back in 2009, when the Albanian economy remained one of the few to register positive growth, inflation rate stood at 3.7 percent. However, in 2008 just before the global crisis broke out the Albanian economy grew by 7.5 percent with inflation rate at a record low of 2.2 percent.
Deflation risks
A general decline in prices, often caused by a reduction in the supply of money or credit, deflation can be caused also by a decrease in government, personal or investment spending. The opposite of inflation, deflation has the side effect of increased unemployment since there is a lower level of demand in the economy, which can lead to an economic depression. Central banks attempt to stop severe deflation, along with severe inflation, in an attempt to keep the excessive drop in prices to a minimum.
Declining prices, if they persist, generally create a vicious spiral of negatives such as falling profits, closing factories, shrinking employment and incomes, and increasing defaults on loans by companies and individuals.
