Why inflation remains anemic

Cheaper oil, VAT cuts and weakening EU economies keep prices low, raising questions about Greek recovery

The weak inflation in Greece is due both to international factors, such as the euro/dollar exchange rate and the drop in oil prices, and domestic ones, such as the cuts in value-added tax at restaurants and on energy products, says Alpha Bank in its weekly bulletin on economic developments.

The bank’s research department also notes that inflation in Greece’s trading partners is trending downward.

It was not long ago that news of nearly zero inflation would be considered good in a country like Greece that once suffered from double-digit inflation for 23 straight years, from 1972 to 1995. Since then, however, the country has become accustomed to bouts of deflation during the last decade’s traumatic economic crisis and weak inflation is now widely perceive as a sign of a weak recovery or, worse, a warning of yet another downturn.

On the basis of Eurostat’s Harmonized Index of Consumer Prices, yearon-year inflation remained marginally positive in July at 0.4 percent, slightly higher than June’s 0.2 percent, while the average for the first seven months of the year was 0.7 percent. This is lower than the eurozone average of 1.1 percent in July and 1.3 percent in June, which in turn are both lower than the European Central Bank’s target of 2 percent.

The weakening of inflation reflects above all the reversal in the rise of oil prices during the first quarter of 2019 and their stabilization at levels lower than the same period in 2018. This development more than makes up for the weakening of the euro versus the dollar, which makes imports more expensive. However, since a third of imports concern energy products, the decline in oil prices is decisive. The lower VAT on energy products over the past two months compounds the effect of oil prices.

The weakening inflation in eurozone countries, Greece’s main trading partners, also reflects a weakening in their economic activity and, especially, the decline of industrial production in the big European economies.

At least the eurozone countries have benefited from economic growth during the past decades, while Greece was mired in a deep depression. Will its still-anemic recovery continue?