Your Federal Quarterly Tax Payments are due April 15th Get Help Now >>

Agflation in the New Member States, Some Stylized Facts by nsg17557

VIEWS: 4 PAGES: 6

									                            “Agflation” in the New Member States—Some Stylized Facts1
Deputy governor Rybinski of the National Bank of Poland, recently warned that “agflation”
(i.e., food price-induced inflation) in the new member states of Eastern Europe (NMS10) is
threatening macro stability and accession to the eurozone. Indeed, food prices affect
inflation more in the NMS10 than in the euro zone (EU12)2 and this may make it more
difficult to meet the Maastricht inflation criterion, at least in the short term. Performance
within the region varies, however: while a recent supply shock played a role in South-
Eastern Europe, developments in the other NMS10 have been more gradual and in line with
world prices. Recent food price increases exceeded cyclical fluctuations, suggesting a
structural break with historical trends. Nevertheless, a partial reversal appears likely.

Price Developments in New and Old EU Member States

Consumer inflation in the NMS10 has been rising since 2006, increasingly driven by
food prices. The inflationary trend in the NMS10 started in late 2006 (Fig. 1). The widening
gap between total and non-food inflation3 suggests that food prices played an important role
in this process, and this role has recently magnified. Prices of other goods and services have
also been rising since mid-2006 and, with the recent oil price spike, the contribution of
energy is now increasing as well. But food remains the biggest contributor.

Figure 1
                                                                                                      NMS10: Inflation developments 2004-07

                                      HICP 2004-07 (YoY, in percent)                                                                                                            Contributions to HICP 2004-07 (YoY, pp)

                                                         HICP                              Non-food HICP                                                                                                       Food                        Energy                              Other
     7
                                                                                                                                                           3.7
     6
                                                                                                                                                           3.2
     5
                                                                                                                                                           2.7

     4
                                                                                                                                                           2.2

     3
                                                                                                                                                           1.7

     2
                            Difference between total and non-food inflation (pp)                                                                           1.2

     1
                                                                                                                                                           0.7

     0                                                                                                                                                     0.2


     -1                                                                                                                                                    -0.3
                   Apr-04

                            Jul-04




                                                       Apr-05

                                                                Jul-05




                                                                                            Apr-06

                                                                                                     Jul-06




                                                                                                                                Apr-07

                                                                                                                                         Jul-07
          Jan-04




                                     Oct-04

                                              Jan-05




                                                                         Oct-05

                                                                                  Jan-06




                                                                                                              Oct-06

                                                                                                                       Jan-07




                                                                                                                                                  Oct-07




                                                                                                                                                                           Apr-04
                                                                                                                                                                                    Jul-04




                                                                                                                                                                                                                Apr-05
                                                                                                                                                                                                                         Jul-05




                                                                                                                                                                                                                                                    Apr-06
                                                                                                                                                                                                                                                             Jul-06




                                                                                                                                                                                                                                                                                         Apr-07
                                                                                                                                                                                                                                                                                                  Jul-07
                                                                                                                                                                  Jan-04




                                                                                                                                                                                             Oct-04
                                                                                                                                                                                                      Jan-05




                                                                                                                                                                                                                                  Oct-05
                                                                                                                                                                                                                                           Jan-06




                                                                                                                                                                                                                                                                      Oct-06
                                                                                                                                                                                                                                                                                Jan-07




                                                                                                                                                                                                                                                                                                           Oct-07




Source: Eurostat, staff calculations.


1
    Prepared in by Christoph Rosenberg, Robert Sierhej, and Marcel Tirpak with assistance from Agata Kariozen.

2
  NMS10 includes Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovenia, Slovakia,
and Romania. EU12 includes the ‘old’ Euro zone members, i.e., excluding Slovenia
3
    Eurostat’s HICP (harmonized index of consumer prices) is used as measure of inflation in this note.
                                                                                                                                                   -2-

Developments in the NMS10 differ from the EU12, where inflation accelerated only
recently and food is not playing a crucial role. EU12 inflation picked up sharply in the last
months, breaching the ECB target (Fig. 2). Unlike in the NMS, the gap between total and
non-food inflation is neither particularly high nor rising sharply. Indeed, a decomposition of
EU12 inflation shows that energy prices were the main driver behind their recent price surge.
The pressure from food prices is also starting to be felt, although the process is much more
gradual than in the NMS10.

Figure 2
                                                                                                       EU12: Inflation developments 2004-07

                                      HICP 2004-07 (YoY, in percent)                                                                                                                          Contributions to HICP(YoY, pp)

                                                         HICP                           Non-food HICP                                                                                                           Food                        Energy                              Other
    3.0
                                                                                                                                                            1.5

    2.5
                                                                                                                                                            1.3


    2.0                                                                                                                                                     1.1

                                                                                                                                                            0.9
    1.5
                                                                                                                                                            0.7

    1.0                                                                                                                                                     0.5

                                            Gap between total and non-food inflation (pp)                                                                   0.3
    0.5

                                                                                                                                                            0.1
    0.0
                                                                                                                                                            -0.1


    -0.5                                                                                                                                                    -0.3
                                                                                                                                                                            Apr-04
                                                                                                                                                                                     Jul-04




                                                                                                                                                                                                                 Apr-05
                                                                                                                                                                                                                          Jul-05




                                                                                                                                                                                                                                                     Apr-06
                                                                                                                                                                                                                                                              Jul-06




                                                                                                                                                                                                                                                                                          Apr-07
                                                                                                                                                                                                                                                                                                   Jul-07
                                                                                                                                                                   Jan-04




                                                                                                                                                                                              Oct-04
                                                                                                                                                                                                       Jan-05




                                                                                                                                                                                                                                   Oct-05
                                                                                                                                                                                                                                            Jan-06




                                                                                                                                                                                                                                                                       Oct-06
                                                                                                                                                                                                                                                                                 Jan-07




                                                                                                                                                                                                                                                                                                            Oct-07
                             Jul-04




                                                                  Jul-05




                                                                                                      Jul-06




                                                                                                                                          Jul-07
           Jan-04
                    Apr-04


                                       Oct-04
                                                Jan-05
                                                         Apr-05


                                                                           Oct-05
                                                                                    Jan-06
                                                                                             Apr-06


                                                                                                               Oct-06
                                                                                                                        Jan-07
                                                                                                                                 Apr-07


                                                                                                                                                   Oct-07




Source: Eurostat, staff calculations.


Inflation Patterns within the New Member States

While food prices are exerting increasing inflation pressures in all NMS, supply-side
factors appear to play a larger role in Romania and Bulgaria than elsewhere in the
region. Inflation developments broken into three sub-groups—Baltics, central Europe
(CEE5), and southeastern Europe (SEE)—are presented in Figure 3.

•                   Inflation in the Baltics has been rising fast since the second half of 2006, both for
                    total and non-food HICP. Food prices started to play a role in 2006 and pressures
                    appear to have increased recently. Among the Baltics, the divergence between food
                    and non-food inflation is strong in Lithuania and not so significant in Latvia and
                    Estonia. One reason may be that overall demand pressures affecting all consumer
                    goods played a larger role in the latter countries. It may also reflect some structural
                    differences between agricultural sectors.

•                   The CEE5 countries have the lowest inflation rates in the region, reflecting their
                    monetary regime that allows for nominal exchange rate appreciation and higher real
                    interest rates. Nevertheless, food price patterns are similar to the Baltics, with upward
                    pressures starting last year, and increasing in the last months. The Czech Republic
                                                              -3-
                           seems to face the most severe pressures, with the highest gap between total and non-
                           food inflation among the CEE5 and food prices growing faster than in neighboring
                           Slovakia or Poland.

•                          The SEE countries appear to be facing a genuine supply shock this year: relative
                           food prices rose sharply during the harvest months, opposite to the pattern of past
                           years. While inflation in Bulgaria is much higher than in Romania, food price trends
                           are similar suggesting that both countries were heavily affected by the drought this
                           summer (see below).

Figure 3
                                                                                                     NMS10: Sub-regional inflation developments 2004-07 (YoY in percent)
                                                        Baltics                                                                                                  CEE5 countries                                                                                                      SEE countries

    12                                        HICP               Non-food HICP                                         12                                       HICP               Non-food HICP                                         12                                       HICP                Non-food HICP


    10                                                                                                                 10                                                                                                                10


    8                                                                                                                   8                                                                                                                 8


    6                                                                                                                   6                                                                                                                 6


    4                                                                                                                   4                                                                                                                 4



    2                                                                                                                   2                                                                                                                 2
                           Gap between food and non-food inlation (pp)


    0                                                                                                                   0                                                                                                                 0



    -2                                                                                                                 -2                                                                                                                -2
                  May-04




                                               May-05




                                                                          May-06




                                                                                                     May-07




                                                                                                                                     May-04




                                                                                                                                                                 May-05




                                                                                                                                                                                            May-06




                                                                                                                                                                                                                       May-07




                                                                                                                                                                                                                                                       May-04




                                                                                                                                                                                                                                                                                   May-05




                                                                                                                                                                                                                                                                                                              May-06




                                                                                                                                                                                                                                                                                                                                         May-07
                            Sep-04




                                                        Sep-05




                                                                                   Sep-06




                                                                                                              Sep-07




                                                                                                                                              Sep-04




                                                                                                                                                                          Sep-05




                                                                                                                                                                                                     Sep-06




                                                                                                                                                                                                                                Sep-07




                                                                                                                                                                                                                                                                Sep-04




                                                                                                                                                                                                                                                                                            Sep-05




                                                                                                                                                                                                                                                                                                                       Sep-06




                                                                                                                                                                                                                                                                                                                                                  Sep-07
         Jan-04




                                     Jan-05




                                                                 Jan-06




                                                                                            Jan-07




                                                                                                                            Jan-04




                                                                                                                                                       Jan-05




                                                                                                                                                                                   Jan-06




                                                                                                                                                                                                              Jan-07




                                                                                                                                                                                                                                              Jan-04




                                                                                                                                                                                                                                                                         Jan-05




                                                                                                                                                                                                                                                                                                     Jan-06




                                                                                                                                                                                                                                                                                                                                Jan-07
Source: Eurostat and staff calculations.




Factors Underlying Food and Non-Food Price Developments in the New Member States


•                          World prices: World prices for key agricultural products have recently soared,
                           reflecting growing demand from emerging market countries, the switch to bio-fuel
                           production and, more recently, an output shortfall in Australia. Data for Poland
                           suggest that for internationally traded commodities like wheat NMS10 prices broadly
                           follow global trends (Fig. 4). Similarly, many agricultural output prices (e.g., cereal)
                           track EU-wide movements. This suggests that global “agflation” is an important
                           factor in food price inflation in the region. It does not, however, explain why the
                           effect is stronger in the NMS10 than in the EU12 countries.
                                                                                                                            -4-
Figure 4

                                                                                            Prices of raw agricultural products


                                      Wheat prices 2006-07 (US$/t)                                                                                    Cereal output prices
                                                                                                                                                  (nominal index, Q1'2006=100)

    350                                                 World                 Poland
                                                                                                                                  180                                 EU15             NMS10

    330
                                                                                                                                  170
    310
                                                                                                                                  160
    290

    270                                                                                                                           150

    250
                                                                                                                                  140
    230
                                                                                                                                  130
    210

                                                                                                                                  120
    190

    170                                                                                                                           110

    150
                                                                                                                                  100
                                               Feb-07




                                                                          May-07
                    Nov-06




                                                                                                      Aug-07
                             Dec-06




                                                                 Apr-07




                                                                                             Jul-07



                                                                                                               Sep-07
          Oct-06




                                      Jan-07



                                                        Mar-07




                                                                                   Jun-07




                                                                                                                        Oct-07




                                                                                                                                        2006q01



                                                                                                                                                  2006q02



                                                                                                                                                            2006q03



                                                                                                                                                                             2006q04



                                                                                                                                                                                        2007q01



                                                                                                                                                                                                  2007q02



                                                                                                                                                                                                            2007q03
Source: FAO, Eurostat, CSO Poland, staff calculations.




•                  Agricultural output: Output data suggest that the NMS10 have lately been more
                   adversely affected by bad crops than the EU12. Most importantly, wheat production
                   in SEE (Romania and Bulgaria) declined by 40 percent this year (Fig. 5), probably
                   contributing to the sharp rise in their food prices shown in Fig 3. Wheat crops in the
                   Baltics and CEE5 dropped in 2006, a possible reason why their upward trend in food
                   prices started already last year. The better harvest in 2007 did not suffice to restore
                   the pre-2006 production level.4 The Eurostat estimates indicate that maize also
                   suffered; for example, yields per hectare dropped by 70 percent in SEE. Moreover,
                   CEE5 fruit production was hit by frost this year, with Poland--the largest producer in
                   the NMS10--experiencing a decline of 20-50 percent (depending on the kind of fruit).
                   While difficult to quantify and disentangle from global and EU-wide price
                   movements, all this suggests that disruptions to local agricultural production have
                   played some role in the rise of NMS10 food prices since 2006.




4
  Data for Poland suggest that the ongoing structural shift in agriculture towards bio-fuel production is playing a
role: the farmed area of rapeseed grew by 27.5 percent this year. Comparable data for other NMS are probably
available on request from statistical offices.
                                                                          -5-
Figure 5

                                           Agricultural output and food price developments

                 Wheat output 1996-2007 (in 1000 t)                                                                Food price indices (2005=100)
                 Baltics       CEE         SEE        EU12 (ra)                                                                               EA12                       NMS10
40000                                                                 100000    120

                                                                      90000
                                                                                115
                                                                      80000
30000
                                                                      70000     110

                                                                      60000

                                                                                105
20000                                                                 50000

                                                                      40000
                                                                                100
                                                                      30000
10000
                                                                      20000      95


                                                                      10000
                                                                                 90




                                                                                               Apr-04
                                                                                                        Jul-04




                                                                                                                                   Apr-05
                                                                                                                                            Jul-05




                                                                                                                                                                       Apr-06
                                                                                                                                                                                Jul-06




                                                                                                                                                                                                           Apr-07
                                                                                                                                                                                                                    Jul-07
                                                                                                                 Oct-04




                                                                                                                                                     Oct-05




                                                                                                                                                                                         Oct-06




                                                                                                                                                                                                                             Oct-07
                                                                                      Jan-04




                                                                                                                          Jan-05




                                                                                                                                                              Jan-06




                                                                                                                                                                                                  Jan-07
    0                                                                 0
        1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007


Source: Eurostat and staff calculations.


•          Consumption structure: The role of food in the consumer basket is much higher in
           the NMS10 than in EU12 countries (Tab. 1). This implies that any food price shock
           has a more severe impact on measured headline inflation. While the weight of food in
           NMS10 consumer baskets has been declining, it remains close to 30 percent on
           average (above 40 percent in Romania), some 10 ppt higher than in the EU12.



                           Table 1. H ICP w eigths 2004-07
                                               2004        2005                  2006                            2007                Average 2004-07
                                                              EA12
                           Goods                58.7       59.2                  59.2                            59.2                                  59.1
                           o/w
                                Energy           8.1         8.6                  9.2                             9.6                                   8.9
                                Food            19.5        19.6                 19.3                            19.5                                  19.5
                           Services             41.3        40.8                 40.8                            40.8                                  40.9
                                                             NM S10
                           Goods                73.6       71.1                  70.8                            70.4                                  71.5
                           o/w
                                Energy          14.5        14.4                 14.6                            14.3                                  14.5
                                Food            32.9        30.6                 29.7                            29.0                                  30.6
                           Services             26.4        28.9                 29.2                            29.6                                  28.5




Prospects for Food Price Developments

Historical trends and market expectations on world prices point to a partial reversal of
recent food price inflation next year. Historical data show a high cyclicality of food prices
relative to non-food items in the NMS, much larger than in the EU12—even after their
accession to the common agricultural market in 2004 (Fig. 6). The recent food prices jump in
                                            -6-
the NMS10 is, however, beyond normal fluctuations, suggesting a possible structural break
in the historical food vs. non-food price patterns. Nevertheless, there are reasons to believe in
some reversal of the recent price growth next year. First, it is not clear that unfavorable
weather conditions—globally and locally—will be repeated in 2008 (unless one believes that
they are related to global climate change). Secondly, one would expect a supply response
from farmers in reaction to recent price hikes. This cautiously optimistic outlook is also
reflected in market expectations: wheat derivatives, for example, suggest an expected 25
percent decline in world prices compared to current levels. Any such decline would benefit
headline inflation in the NMS10 more than in the EU12 countries.

Figure 6
                                                                   C y c lic a l d e v e lo p m e n ts a n d m a r k e t e x p e c ta tio n s o n fo o d p r ic e s

                                     C y c lic a l tr e n d s in fo o d p r ic e s                                                                                                   W o r ld w h e a t p r ic e s (U S $ /t)
                            (to ta l to n o n -fo o d H IC P , D e c . 2 0 0 2 = 1 0 0 )
                                                                                                                                                    350
   102                                                            EA12                       NM S10
                                                                                                                                                    330

   102
                                                                                                                                                    310


   101                                                                                                                                              290

                                                                                                                                                    270
   101
                                                                                                                                                    250

   100                                                                                                                                              230

                                                                                                                                                    210
   100

                                                                                                                                                    190
     99
                                                                                                                                                    170

     99                                                                                                                                             150
                              Aug-03




                                                         Aug-04




                                                                                    Aug-05




                                                                                                                Aug-06




                                                                                                                                           Aug-07
          Dec-02

                   Apr-03



                                       Dec-03

                                                Apr-04



                                                                  Dec-04

                                                                           Apr-05



                                                                                              Dec-05

                                                                                                       Apr-06



                                                                                                                         Dec-06

                                                                                                                                  Apr-07




                                                                                                                                                                   Nov-06




                                                                                                                                                                                                 May-07




                                                                                                                                                                                                                            Nov-07




                                                                                                                                                                                                                                                       May-08
                                                                                                                                                          Sep-06




                                                                                                                                                                                                          Jul-07


                                                                                                                                                                                                                   Sep-07




                                                                                                                                                                                                                                                                Jul-08
                                                                                                                                                                            Jan-07


                                                                                                                                                                                        Mar-07




                                                                                                                                                                                                                                     Jan-08


                                                                                                                                                                                                                                              Mar-08
S o u rc e : E u ro sta t, F A O , sta ff c a lc u la tio n s.

								
To top