Tuesday, 10 May 2011

Greek inflation update - what second round effects...?

I keep wondering when will this farce end ? I'm talking about the hikes in VAT and their effects on household consumption and real household disposable income...

source: statistics.gr

My intention when starting this was to look for second-round effects due to the rise in oil prices. Due to the new hike in VAT on 1/2011 and all the other tax hikes, this is simply impossible. Governement policy has totally distorted demand/supply signals and has halted the price discovery process.

In order to get a taste of what's really going on I had to plot data going back to 2007 in order to get a sense of how the market operates when undisturbed (although such a thing can never be claimed for Greece).

During 2007 the oil price rally was still buildng steam, while in 2008 oil prices spiked significantly. So there is safe to say that if there were any "second round effects" from the rise of oil prices they would be more visible during 2008.

As you can see from the chart on April 2008 prices, for most groups of goods and services, spiked, so maybe these so called second round effects were present. Fast forward to 2011, if we try to look behind the price-distorting indirect taxes hikes, we can see that for all price and income elastic goods and servies prices grew less than the associated tax hikes would have implied. One could say then that second round effects were somewhat muted due to weak demand.

For goods and services that are less price and income elastic, prices spiked significantly assisted in that by tax hikes. Besides, for each group of goods or services, price movements reflect in some degree intra-sector dynamics.

So maybe, just maybe, second-round effects in Greece would have been and indeed are limited. The price increases observed are mostly due to indirect tax hikes and only enlarge demand destruction and pressures in employment.

That's what stagflation will do to you...

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