“Currently, there is galloping inflation in Bulgaria. Look at the countries in Europe that are in the eurozone, there are countries that have way higher inflation rates.”
These are Tsoncho Ganev’s words who is a member of Vazrazhdane (The Revival Party), and were uttered by him in his capacity as an MP candidate in a pre-election interview on BNT (Bulgarian National TV) on November 6, 2021. The context of his speech is Bulgaria’s future membership in the eurozone.
A similar thesis was expressed several times by IMRO (Internal Macedonian Revolutionary Organization). According to the party leader (now retired) Krassimir Karakachanov, inflation is galloping. In the summer, the formation led national protests “against all price increases.” Back then they announced that “a terrible inflation is coming” and that the so-called parties of change have thrown the country into uncertainty and speculation.”
The topic of excessive price increases was often discussed in the election campaign. But what are the facts?
What is inflation and when is it galloping?
Inflation is a monetary phenomenon in which there is a general increase in the prices of goods and services and not just some individual items. This would mean that today you can buy less with 1 lev than yesterday. When calculating the average price increase, the prices of products we spend more on – for example, electricity – have a greater impact.
All goods and services that households consume during the year form the so-called “consumer basket”. Each product in the basket has a certain price that can change over time. The annual rate of inflation is the price of the whole basket in a given month compared to its price in the same month of the previous year.
In this sense –indeed, there is inflation in Bulgaria, as well as in the whole European Union. NSI’s (National Statistical Institute) official statistics show that annually, inflation in Bulgaria reaches 6%. The latest Eurostat data for October shows that the average inflation rate in the EU is 4.1% a year.
However, to talk about galloping inflation, the rise in prices must be between 20 and 200% a year. As it can be seen from the data, there is no such thing in Bulgaria and the European Union, where even the countries with higher inflation rates than Bulgaria are far below the threshold of 20%.
At the same time, the European Commission expects average inflation for the eurozone of 2.4% at the end of the year with a slowdown up to 2.2% in 2022 and a further 1.4% decline in 2023. The Bulgarian Ministry of Finance forecasts an average annual weighted inflation of 2.4%.
Previously, such type of inflation was observed in Bulgaria back in 1996, when prices rose by 122% compared to 1995. In the following 1997, we are talking hyperinflation. Then the purchase value of money dropped by several hundred to several thousand percent in a short period of time. At one point during this period, Bulgaria even registered the highest inflation in the world.
Although it is not possible to talk about galloping inflation of consumer prices in general, such is present in some goods – for example, natural gas prices on international markets have increased by more than 200% in just one year. But this does not mean that the price of natural gas has a direct and proportional effect on the rising prices of all goods and services for the customers. In any case, energy and raw materials prices play a role in determining the final prices.
What is the reason for the price increases?
In the first place – the pandemic. When the world fell into an economic crisis caused by the health crisis, governments around the world began to take measures to protect businesses and citizens from the consequences. That is why, simply put, central banks began to print money and pour it into the economies.
Increasing the money supply in a system always leads to pro-inflationary processes. Such is also the official explanation of inflation, which is not just a rise in prices (which may be due to natural market movements), but in most cases is a consequence of a specific monetary policy, as explained on Chapter 4 in this piece by the ECB (European Central Bank). In other words, inflation is a natural reaction to the world governments and central banks‘ attempts to help their citizens in the crisis, and in this sense – the rise in prices is neither surprising, nor unexpected.
When talking about Bulgaria in particular – inflation in our country is “imported”, i.e. caused by external factors, mostly by the “money flood “, which the European Central Bank undertook during the pandemic (the Bulgarian market and the European market are connected as well as the domestic lev and the common European currency). That‘s what the chief economist of the Bulgarian Development Bank Iliya Lingorski said in an interview with BNT. Bulgaria has no right to print money, due to the condition of the Currency Board it is currently under.
In addition, the pandemic initially caused a shock contraction in global consumption. However, after the release of vaccines, demand began to grow rapidly and economies skyrocketed while many manufacturers were not ready to meet the demand. This also contributed to the price increases at a basic level. In economics, this phenomenon is known as “inflation-demand”, as former Finance Minister Petar Chobanov explains in his paper on inflation.
All this means that price increases will begin to gradually decline as supply chains recover to normal operations and as central banks begin to reduce their incentives to the economies.
The statement that there is galloping inflation in Bulgaria is false.
Translated by Lina Chakarova.