Global Insight
January 2, 2008

Armenian Inflation Moderates Somewhat in December to Bring End-2007
Rate to 6.6%

by Venla Sipila

According to the latest data from the Armenian National Statistical
Service, consumer prices in the country increased by 6.6%
year-on-year (y/y) in December, ARKA News reports. Thus, inflation
eased modestly compared with the November result of 6.8% y/y, while
remaining above the October rate of 5.7% y/y. Specifically, food
prices surged by 10.9% y/y in December, while prices of non-food
goods increased by a relatively modest rate of 2.5% y/y and service
prices rose by 3.2% y/y. Measured month-on-month (m/m), consumer
prices grew by 1.5% in December, after rising by 2.1% m/m in
November. The cost of food increased by 2.8% from November, while
prices of non-food products gained 0.8% m/m and service charges eased
by a marginal rate of 0.1% m/m. The last monthly data for the year
brought the annual average inflation rate to 4.4%. Prices of food
products increased by an average rate of 6.7% over 2007. Meanwhile,
the cost of non-food goods retreated by 0.5% and service prices
gained 4.2% on the average over the year.

Further, it was reported that the average monthly consumer price
inflation during 2007 amounted to 0.5%, 0.1 percentage points more
than over 2006.

Significance:The CBA's inflation-targeting policy has proved
relatively successful, even if implying the strong appreciation of
the dram exchange rate, in conditions of strong foreign remittance
and FDI inflows. The annual average inflation rate for 2007 came in
slightly below our latest forecast. Nevertheless, as we expected, the
end-year rate exceeded the inflation rate of 4% specified as the
target in the year's budget. Consumer prices in Armenia were in 2007
under upward pressure due to both external and domestic reasons.
While demand is strong in the rapidly expanding economy, inflation is
also pushed upwards from the cost side due to high prices of
commodities and food. Economic growth in Armenia over 2007 has proven
still stronger than originally expected, while also high food prices,
due to weak grain harvests in particular, have led to several upward
revisions in our Armenian inflation projections over last year. Some
moderation in Armenian inflation is likely over the new year, as
growth should finally moderate from the double-digit rates. However,
domestic demand is likely to still remain robust, while commodity
prices are also expected to remain at very high levels for some time
to come. Thus, upward appreciation pressure on the dram is likely to
persist as well.