World Markets Research Centre
Global Insight
April 2, 2010

Rate of Armenian Price Surge Eases in March

BYLINE: Venla Sipila

The latest inflation data from the Armenian National Statistical
Service testify to still high but somewhat easing price pressures.
Indeed, March saw consumer prices soar by 8.8% year-on-year (y/y),
after annual gains of 9.4% and 7.0% had been posted in February and
January, respectively. In particular, food prices gained 6.9% y/y,
while prices of non-food items soared by 14.3% y/y, and the cost of
services rose by 10.6% y/y. Compared to February, Armenian consumer
prices in March increased by 0.8%, with pressures from all the three
key categories relatively similar. Over 2009 as a whole, Armenian
consumer prices rose by an average rate of 3.4%, with inflation
pressures strengthening towards the end of the year (seeArmenia: 5
January 2010:).

Significance:Armenian inflation is still running far above the upper
limit of the government’s target range of 4% +/- 1.5 percentage
points. The recent intensification of inflation to a large extent is
the result of dram depreciation, which has a direct impact on import
costs. Then again, looking forward, the rising import prices will
suppress imports, and this is exactly why a flexible exchange rate is
needed at present in Armenia, which still has a wide external
financing gap. In addition, a flexible exchange rate will also help in
inflation control, when, eventually, foreign currency inflows are
likely to recover. The persistently high inflation may prompt the
Central Bank of Armenia (CBA) to lift interest rates further, even if
the importance of the policy interest rate as an effective polity tool
in Armenia remains limited. Armenian inflation may reaccelerate again
in the next months. This is mainly because the price of natural gas
for Armenian consumers will be lifted by 37.5% from 1 April, taking
the retail cost to 132 dram per cubic metre (cm) from 96 cm.
ArmRosgazprom, which imports and distributes Russian gas in Armenia,
is increasing the retail price due to an increase to US$180/1,000 cm
from US$154/1,000 cm in the Russian gas import price.