ARMENIAN ANNUAL INFLATION DECELERATES IN OCTOBER
Venla Sipila

World Markets Research Centre
Global Insight
November 3, 2008

The deceleration of Armenian annual consumer price inflation continued
in October. Indeed, according to the latest figures from the country’s
National Statistics Agency quoted by ARKA News, prices increased by
8.6% year-on-year (y/y) in October, after increasing by 11.3% y/y in
September, 11.5% y/y in August and 10.7% y/y in July. Food prices
rose by 8.3% y/y in October, while the cost of non-food goods and
services increased by respective rates of 6.5% y/y and 10.3% y/y. In
month-on-month (m/m) terms, prices in October increased by 0.7% on the
whole, after gaining 0.5% m/m in September and posting monthly falls
in the three preceding months. The monthly gain was entirely driven
by a 1.7% m/m rise in the cost of food, while prices of non-food
goods and services fell by 0.8% m/m and 0.2% m/m, respectively. The
cumulative price gain for the January-October period registered 4.9%.

Significance:Moderation in inflation rates is welcome in Armenia, where
rapid price growth has given rise to overheating concerns recently amid
very high GDP expansion. Easing annual inflation is likely to continue,
given the falling global international oil prices. In addition, the
recent weakening of the dram exchange rate indicates less pressure for
the Central Bank of Armenia (CBA) to intervene in the currency markets
to try and restrict dram appreciation in the face of strong capital
inflows. Thus, while the Armenian financial system is relatively
isolated from the direct effects of the global financial crisis,
it feels the indirect effect of tighter international liquidity and
overall weakening of global growth. On the first signs of decelerating
inflation the CBA in September left its refinancing rate unchanged,
after eight successive modest rises in previous months (seeArmenia:
6 October 2008:). Armenian economic growth still remains in double
digits, and is driven by domestic spending, boosted for example by
fiscal expenditures. Thus, even though inflation now is moderating and
GDP growth should ease, the CBA would be well advised to be cautious
in monetary loosening, until further signs of clear easing of domestic
demand-side pressures are seen.