MORE THAN YEAR OF DEFLATION

In the list of problems that concern business in Bulgaria, authorities and analysts focus increasingly frequent on chronic deflation. This phenomenon in popular language means decreasing prices. Indeed, the index of retail prices for September, published by the National Statistical Institute this week, shows a decrease of 1.4% since the beginning of the year. Moreover, the trend started in the middle of 2013. From the perspective of consumers this economic phenomenon may seem positive and gives a reason for joy. Who doesn’t like lower prices after all? But from the standpoint of the national economy, business and financial condition of the state, deflation has a negative impact and few experts see it as something positive.

The reasons for deflation in the country are both internal and external. Among the local reasons are regulated prices in the energy market and artificially keeping them low in recent months. Reduced consumption, despite marking a slight increase recently, is not able to actively promote industry and trade and lead to increased profits. We must add to this the falling prices of food and fuel.

Negative inflation means lower incomes for the business. This in turn leads to cutting expenses for labor and reduced investments and innovation. Ultimately, lower prices also mean lower wages for workers. This leads to a reduction in consumption and a new decline in prices. This is called a deflationary spiral and is one of the problems that cause great fears in the European Central Bank. Deflation has negative consequences not only on wages, consumption and employment; it also has a negative impact on government revenues. Lower prices mean lower incomes from VAT, which is the main source of revenue for the treasury. 

Recent measures taken by Bulgarian authorities and expectations related to the economic policy of the new government give rise to some optimism. The next cabinet is expected to keep more to the market realities and not to ignore economic laws.