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Greece's inflation rate is at historically low levels, food and energy prices are at their peak

07 August 2013 / 17:08:16  GRReporter
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The consumer price index reached historically low levels in July, recording a 0.7% decrease compared to the 0.4% decline in June, despite the increase in basic food products and electricity.

The average annual index reached -0.25% at a time when both the European Union (EU) and International Monetary Fund (IMF) were expecting it to reach 0.8% in 2013.

This means that over the next five months it should be expected that the main index would increase more rapidly in order for it to approach, if not reach, the annual target.

In the reports on the progress of the Greek Memorandum, the two international institutions have repeatedly expressed their concerns that the cuts in the salaries in the public and private sector have not been followed by reductions in the prices of goods and services.

In response, the Greek statistical service (ELSTAT) reports another increase in the prices of major categories of goods and services, at a time when household income is steadily decreasing, further limiting the purchasing power of consumers.
The research by ICAP Group, which refers to the data of ELSTAT, indicates that household income dropped by 27% in total in the period 2009-2012.

In particular, the decline in income in 2009-2010 was 8.1%, increasing by another 8% in the period between 2010 and 2011.

The situation did not improve in 2012, as incomes had further decreased and the percentage reached 11%.

This has inevitably affected the consumer behaviour by limiting the demand for certain goods. All the factors in the market agree with this statement.

"Persistent" high prices

Bearing in mind the interdependence between supply and demand, the prices would have to decline by corresponding rates. However, in practice, the economic theory is being refuted, as the price levels remain high compared to the purchasing power of the citizens. The reasons for the "persistence" of the high prices are due to various factors.

According to experts, the small- and medium-sized enterprises attribute the high prices to the following: high delivery prices of their goods compared to large firms, increased operating costs due to the increases in the bills payable to the Public Power Corporation and other structural state enterprises, high oil prices, the tax burden and he inability of the providers to lend.

Distortions of competition

Respectively, in addition to the reasons previously mentioned, the strong players in the field of retail sales attribute the high prices to the following: increased raw material prices, mainly of imported goods, the burden of VAT which cannot always be compensated as well as the common distortions of market competition which, in some cases, create conditions for oligopoly.

In this situation, it is impossible for some sectors of the local business to reduce their prices, which affects the data of the annual comparison of the index in July with the same month of 2012. The reported increases are as follows:

- 0.8% increase in the  "Foodstuffs and soft drinks" group

- Part of this increase was offset by the decline in the prices of cereals by 2.8% and of juices by 12.1%

- 2.6% increase in the "Alcoholic drinks and tobacco" group, mainly due to the 3.5% increase in cigarette prices

- 0.1% in the "Apparel and footwear" group

- 6.7% in the "Housing" group, which was mainly due to the increase in the prices of heating oil by 25.1% and of electricity by 12.3%

- Part of this increase was offset by a 7% decrease in rental prices and a 2.2% decline in the prices of services related to the repair and maintenance of houses

Besides these cases of increased prices, the prices of other goods and services had declined. The data of ELSTAT show the following significant price reductions:

- 5.1% in the "Durable goods - household goods and services" group

- 3.5% in the "Healthcare" group

- 1.5% in the "Transport" group. Part of this decrease was offset by a 15.5% increase in airfares

- 4.3% in the "Communications" group

- 3% in the "Recreation - cultural activities" group

- 4% in the "Education" group

- 1.5% in the "Hotels, cafes, restaurants" group

- 5.4% in the "Other goods and services" group

The index in July 2013 decreased by 1.7% compared to June 2013 and to the 1.4% decline recorded in the same period last year.

Decline in the harmonised index

The harmonised consumer prices index (a comparable measure of inflation in all countries of the EU) declined by 0.5% in July 2013 compared with July 2012.

The largest decrease was registered in the group of "Durable and household goods" whose prices fell by 4.9%, in the group of "Healthcare" where the price reductions were in the range of 4% and in the "Communications" category where the reduction was 4.4% .

The largest increase was reported in the groups of "Alcoholic drinks and tobacco" (2.9%), "Housing" (5.4%) and in "Foodstuffs and soft drinks" (1%).

The key - improving the competitiveness of cheaper goods and services

"As is clear from the data, deflation has been registered for the fifth consecutive month. It was last recorded in 1968 which means that it is pushing the market 45 years back", states Vassilis Korkidis, president of the National Confederation of Greek Commerce.

He explains, analyzing the data of ELSTAT, "The consumer price index reached 108.13 points in July 2013, marking a decline compared to the same period in 2012 and recording the largest decrease, by 13.6%, in the "Apparel and footwear" group followed by the 3.4% decline in the category of "Durable and household goods'' which is mainly due to the summer sales.

The main reasons for the period of deflation we are experiencing include: a) the considerable decline in disposable income, b) the unprecedented prolonged recession, c) the declining effect of the increases in indirect taxes, and d) the significant decline in international fuel prices.

However, it seems that the pressures from the economic recession, the rising unemployment and the reduced income and consumption is continuing, which is leading to the shrinking of the profit margins of the companies and is dragging down supply and demand."

At the same time, market factors indicate that the further development of competition will significantly contribute to the reduction of prices of goods and services.

It has been repeated many times that the Greek economy suffers from the lack of competition in comparison with the economies of other developed countries.

The reasons can be found in the existing structure of certain markets, such as that of retail/wholesale, but also in the lack of reforms in other sectors, mainly in the service sector in which there are still privileged professions that have remained closed.

At the same time, the need for a gradual change in the rates of indirect taxes is being recalled since this will accordingly reduce the prices as seen after the recent decision to reduce VAT in catering from 23% to 13%.

Radical changes in consumption models

The forecasts remain bleak and indicate that goods and services in Greece will remain disproportionately expensive compared to incomes and that the conditions of deflation reported in recent months will have to remain stable for a longer period of time in order for the prices to actually decrease.

What is certain is that the purchasing habits of consumers have significantly changed. This trend, according to market factors, will remain in the future regardless of whether economic recovery will follow.

As claimed by representatives of the food retail branch, Greek consumers have turned to the principle of targeted shopping. A good example of this is the basket in the supermarket that does not contain unnecessary goods.

The same specialists state, "The strategies of the companies doing business in Greece are now aiming at attracting the new consumption model which, until recently, has been followed mainly in the countries of north Europe." In particular, they state, "The image of the consumer who buys half a watermelon is not only a sign of the recession but is part of a culture in which the costs should serve specific needs and only them."

As experts explain, the consumers are limiting their impulsive decisions, increasing the degree of planning their purchases, looking for products at lower prices and for promotions.

At the same time, they are becoming more frugal, limiting the total value of their purchases, focusing on essential goods, reducing their visits to supermarkets and travelling less by car.

Tags: DeflationGreek statistical serviceConsumer price index
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