World Markets Research Centre
Global Insight
May 1 2009

Rapid Rise of Service Prices Drives Accelerating Armenian Inflation in
April

by Venla Sipila

Service and consumer prices in Armenia increased by 3.2%
month-on-month (m/m) in April, in a significant acceleration compared
with the inflation rate of 1.4% m/m seen in March. Different price
categories displayed very varied developments. Specifically, food
prices increased by 2.1% m/m and non-food good prices gained 2.8%
m/m. Meanwhile, reaching 5.6% m/m, the growth of service tariffs
clearly exceeded headline inflation. Annual inflation also accelerated
significantly in April, reaching 3.1% after standing at just 1.0%
year-on-year (y/y) in March. Service prices posted by far the most
rapid gain also in annual comparison; their surge of 11.7% y/y,
comparing to growth of 2.8% y/y in non-food prices, and an annual fall
of 1.6% in food prices. April data brought the cumulative gain in
Armenian consumer prices since the beginning of the year to 3.9%,
while annual inflation for the January-April period came in at 2.3%.

Significance:April inflation developments continue the renewed
intensification in Armenian price pressures. The acceleration seen in
March inflation had mainly been the result of the devaluation of the
dram exchange rate seen earlier in the month, while the April jump in
inflation is mainly attributed to the increase in import prices of
Russian gas. The Russian gas giant Gazprom increased the price of gas
sold to Armenia from $110US/1,000 cubic metres (cm) last year to
$154US/1,000 cm from the beginning of April, and this is reflected in
the rapid acceleration in service tariff growth. While this increase
is lower than initially sought by Gazprom, a previous agreement sees
Armenian gas prices rising to $200US/1,000 cm next year and up to
European market prices in 2011. Service price growth will push
Armenian inflation up in annual terms in the coming months, but the
overall sharp cooling in economic activity will have the opposite
effect. Average monthly inflation still remains clearly below its
year-ago level, and given downward economic momentum, the Central Bank
of Armenia (CBA) may consider further interest rate cuts in the coming
months (see Armenia: 9 April 2009: ). Then again, the potential of
even sharp renewed upward price pressures certainly exist, given the
vulnerability of the dram exchange rate amid Armenia’s high external
financing requirement.