Tuesday, 6 October 2015

VAT increases showing up at Greek inflation data.

Effective July 20th the VAT rate in a number of products and services was raised in Greece. Of course this was immediately felt through increases in the relevant HICP sub-indices. 

I have singled out a couple of them, each one for different reasons.

First, there is a big spike in the Food component. One has to note though that the index had recorded minor increases prior to August throughout 2015 but the effect of the VAT hike is easily discernible.

source: Eurostat

This is a straight hit to lower income brackets since they spend a larger chunk of their income to necessities.

The other sub-index whose trajectory is interesting in my humble opinion is Restaurants and Hotels since it covers, perhaps the only sector of the Greek economy that is, or rather was, booming. It remains to be seen what the future holds for Greek tourism.

source: Eurostat
I have expressed my worry regarding how the tourism sector will perform in an environment of prices increases in the past. More on that subject next year I suppose. 

All-items HICP didn't record an actual increase but the deflation rate slowed down significantly. I don't know if we'll get positive figures for the headline index but with the food and most likely education (not defitive yet since our government does it's best to show everyone that it means business - insert sarcasm here) sub-indexes spiking there's no need. This is gonna feel pretty "good" for households and "experts" denouncing deflation as the mother of all ills. Well, when the demand curve shifts to the left deflation is only a natural consequence. If the supply curve shifts to the left too (as it did in Greece) then equilibrium  moves lower and we get a little more time of deflation. Of course, the fact that Greek leaders prefer introducing taxes than losing the clientelistic state tool makes it a whole lot harder to know what's next...

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