Which prices we can and which we cannot influence

Photo-illustration: Pixabay

Deputy General Director of the Sector for Economic Research and Statistics of the NBS, Milan Trajković, told RTS that it is estimated that at least two thirds of the total inflation is a consequence of import inflation, and whether it would be increased without that, the answer is: it would be. Trajković says that the inflation could reach the maximum in June or July this year, it is not expected to exceed 11%.

According to statistics, monthly inflation in May was 1.2 percent, which is lower than the previous month. However, the year-on-year price increase exceeded the double-digit limit and was 10.4 percent, despite the restrictions on the prices of basic foodstuffs and fuel. Most of the inflation is caused by external factors, primarily the rise in energy, food and logistics prices. What would be the real inflation, and how much is imported?

Trajković says that the year-on-year inflation rate in May was 10.4 percent, and that after ten years we are facing such high inflation.

“We have to distinguish the factors that then acted on higher inflation from those that act now. “Ten years ago, the key factor in inflation was the depreciation of the exchange rate, today that is not the case,” says Trajković.

Several other factors have joined, we have a big problem with what we call import inflation, there are not only products we import, such as coffee, southern fruits or clothes and shoes, but it is, above all, the prices of energy and raw materials that have risen significantly. underlines Trajković.

Oil and other energy sources are part of the cost of a large number of products

It is not just about oil, says Trajković. The price of oil has increased by some 70 percent, and now for the first time we have that the price of gas, electricity and coal is so much higher on the world market.

According to him, in some earlier periods, when oil jumped twice, and gas jumped twice with a certain delay, now gas is not doubled, but the price of gas is increased five, 10 or 15 times, depending on the period you are watching.

Photo-illustration: Pixabay

The situation with the price of electricity is very similar, in the previous ten years it ranged from 30 to 50 or 60 euros per megawatt, today it is between 100 and 300 euros per megawatt depending on the day, and it was 400 euros.

The situation is the same with coal, whose price is three to five times higher than in the same period last year.

Oil is not important only because of the price of fuel we pay at gas stations, and the price of electricity and gas is not important only because of the price paid by households, it is that oil and other energy sources are part of the cost of many products. “, Said Trajković.

How much is import inflation

Core inflation has been twice as low as the total ever since we faced this problem, and in May it was twice as low as the total, at about 6.3 percent, Trajkovic said.

According to him, within core inflation, you have a part that is import inflation. It is difficult to say exactly how much import inflation is, because the process of forming retail prices is complex.

“According to the methods available to us, we estimate that at least two thirds of the total inflation is a consequence of import inflation, how much inflation would have been without it, whether it would have been increased without it,” said Trajković.

If you look at the NBS projections and reports from 6 and 12 months ago, we said then that inflation will be higher in the coming period, we had a problem with global supply chains, which was taken into account, he added.

“All governments of the world had great fiscal and monetary incentives to mitigate the economic consequences of the coronavirus pandemic, including our government, which led to an increase in the amount of money in circulation,” Trajković recalls.

After all that, there was a deterioration of the food and energy markets in the world, stocks were made by countries like China, which significantly raises prices with its demand, and the war in Ukraine came after all that.

“There is a tendency to attribute all the problems to the war in Ukraine,” Trajkovic said. “It is true that the war in Ukraine did not cause these problems, but contributed to them, we are facing an additional increase in the already high price of energy and food, precious metals.”

The impact of oil prices on certain products

Citing the example of bottled water, Trajković says that when people buy bottled water, they think they are paying for water, and they are paying for oil – water costs almost nothing.

Photo illustration: Unsplash (John Cameron)

The tax that the producer pays to the state for bottled water is a dinar or two, everything else is oil. The bottle, cap and label are made of oil, you pay for the oil, not the water, plus transport. Just one plastic bottle requires a quarter of a liter of crude oil.

Eight percent of the world’s oil is used to produce plastic packaging. It’s not just about water – for dairy products, packaging makes up 15 to 30 percent of the cost of production. For one standard car tire, in addition to rubber, 25 to 30 liters of crude oil are needed. The same situation is with cosmetics, clothes and shoes.

Two thirds of all materials used in the production of clothing and footwear come from crude oil. All clothes, shoes, synthetic materials, polyester, acrylic come from crude oil.

Trajković points out that 90 to 95 percent of all compounds used in the production of cosmetics come from crude oil.

What’s more, two things are important

It is difficult to talk about inflation at the moment, especially in the next few months, because of the war in Ukraine, the risks have increased significantly. Trajković says that inflation could reach a maximum in June or July this year, we do not expect it to exceed 11%.

Risks of inflation projection, each projection necessarily carries assumptions, may or may not materialize.

Two things are important, one is the agricultural season, our assumption is that the agricultural season will be average, a little better than last time when there was a drought, there should be no recurrence of drought and no additional escalation of the war in Ukraine, says Trajković.

“As we can see, at the end of the year, inflation would be lower than 10 percent, about nine percent, if it could reach the limits of the NBS inflation target,” said Trajković.

“As far as the exchange rate is concerned, that is one of the basic ways in which the NBS preserves the stability of core inflation, that is the part we can influence. “The current governor is pursuing an exchange rate policy where excessive daily exchange rate fluctuations are not allowed, and thus we are influencing the stabilization of not only core inflation but also expectations in the entire economy,” Trajković noted.

“Not only inflation is important, but also indicators of business confidence, indicators of consumer confidence, all this has to do with the exchange rate,” concluded Trajković.

Source: RTS

Source: Energetski portal Srbije by www.energetskiportal.rs.

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