NEWS / Foreign Exchange

A full plate is getting more expensive

Food and energy prices continue to rise in Central and Eastern European countries, creating headaches for many of the central bank??™s authorities. Rising inflation due to accelerating food and energy prices seems to be getting out of control in many countries across the region, pushing inflation outside of the central bank??™s inflation targets or the government??™s official inflation forecasts.

Many central banks, after enjoying the euphoria of strong growth and fairly low inflation, have to face sudden, building inflationary pressures, which in many countries have pushed inflation outside the inflation target almost from one month to another. This is especially the case in the countries where food and energy prices have a big weight in the consumer basket. If we look at the chart on the left, Ukraine, Russia, Ro-mania and Kazakhstan belong to the group of countries where the food prices have a big share of the consumer basket and therefore the food prices con-tribute a lot to inflation.

It is interesting how the authorities in different countries have decided to fight building inflationary presures due to rising food prices. The Romanian central bank has realised that it is the time to initiate a tightening cycle in order to bring inflation back to the inflation target and will, after several rate cuts this year, initiate tightening of monetary conditions. Russia, led by President Putin, has decided to re-introduce old Soviet-style food price restrictions for basic goods to curb food price pressure.

The question remains as to what those countries with fixed exchange rate policies ??? the Baltic states and Bulgaria??? who are also struggling with rising inflation, will do. If inflation is not brought under control, the economic sustainability of the pegs becomes more and more critical.