Sunday, 4 June 2017

More proof that Greek deflation was not due to anemic demand

These past few years we were showered with superficial analysis by celebrity economists (academic or not) who claimed that the occurrence of deflation in Greece can be blamed on the policies implemented because of the MoU.

This particular line of thinking is something found in economics textbooks and it could have very well been the case in another country where product and services markets functioned properly. But not in Greece. 

I had written another post about this in 2016 but I choose to revisit this now because of the fact that inflation in Greece turned positive again.

As I had claimed back then, inflation peaked almost 4 years after final consumption did so how can someone, in all seriousness, claim that these two incidents were directly connected? Now as far as the deflationary nature of the policies implemented is concerned I beg to differ and say that, on the contrary, some of them (like indirect taxes hikes for example) were clearly inflationary and contributed to the incidence of stagflation (and also to the higher rate of inflation that Greece experienced post-EMU accession) during the early years of the Greek adjustment program. 

Now, to stop blabbing, the reason that deflation left the building is the same that brought it on back in early 2013, a change in import prices. 

source: ELSTAT

As the chart makes rather obvious, both of the times that the inflation rate changed from positive to negative territory (and vice versa) were preceded by analogous changes in import prices. The biggest component of the import price index by far is crude oil, which accounts for 21,3% of the total, so this is the component that mostly drives headline figures. 

So, instead of generic analysis derived from first-year economic textbooks maybe, for a change, we should pay attention to facts and to the special features that make every economy different.

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