Developments in the Consumer Price Index (CPI)

Consumer price developments in January-May 2003 did not display the usual seasonal pattern. This “puzzle” reflects the appreciation of the nominal exchange rate against the U.S. dollar (by about 17 percent since January 1, 2003) and the influence on food prices of the delay in spring weather. The regular mid-year drop in prices is expected to be more pronounced than usual, and indeed is already noticeable in early figures for June.

The analysis of inflation involves an assessment of several factors, including cost pressures, inflation expectations, economic policies, institutional arrangements (including administered prices), and an examination of developments in relative prices.

The driving force behind the acceleration of inflation was an increase in food prices by 8 percent in March-May 2003. This mainly reflected increased prices for fruits and vegetables, caused by delay of the harvest because of adverse weather conditions. Fruits and vegetables account for 6 percent of the consumer price basket; fruit and vegetable prices rose by 43 percent in this period, thus accounting for 2.5 percentage points of the 8 percent increase. Of those two food categories, most of the increase was due to vegetables prices, which in May 2003 were 42 percent higher than in March.
Prices on non-food products and services actually fell by 1.2 percent during the period March-May. This development is consistent with the continued appreciation of the som against the U.S. dollar and with lower excise tax rates, in particular on gasoline. The decline of non-food products and services partly offset the increases in food prices and points to a substantial change in underlying relative prices between food and non-food.

Monetary policy continues to be tight and did not contribute to the unusual March-May inflation. Strong demand for the national currency is reflected in the appreciation of the nominal exchange rate. Monetary policy (such as through NBKR open market operations) has combined with the appreciation to appropriately restrain core inflation.
The unusual seasonality displayed earlier in the year began to reverse itself in June. The tighter supply of food that drove inflation developments in March-June appears to have been loosened, with the new harvest now coming to the market. Since there was a higher price increase in the spring, a bigger price decline is expected in the summer months.
In summary, the CPI developments in March-May seem to have been a transitory phenomenon. The CPI is not expected to accelerate during the coming months. Developments in the first three weeks of June, when the 12-month CPI dipped by 1.8 percent, appear to be confirming this view.

Contributor:
Elena Loukoianova

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