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Core inflation rose again in January, reaching a new all-time high

Written by SOT.COM.AL 7 Mars 2023
Core inflation rose for the second month in a row in January and hit a new all-time high.
According to data from the Bank of Albania, core inflation reached 8.74%, from 8.42% in December last year. The level of the month of January is higher since 2009, when the series of historical data of the Bank of Albania also begins.
After experiencing a temporary slowdown in November last year, core inflation has returned to growth, signaling that the containment of price growth in the economy is still far from over.
Core inflation measures the change in consumer prices, excluding those products that by their nature have high volatility, mainly food and energy products. The purpose of core inflation is to strip overall price growth of the effects of supply shocks or other factors with short-term impact.
However, according to the Bank of Albania, in the calculation of basic inflation, it also includes some special food products, which over the years have proven price stability. According to Central Bank experts, this is one of the reasons why Albania has a fairly high base inflation compared to other economies.
For the Eurozone, the core inflation indicator in February reached 5.6%, further increasing from the 5.3% level in January. The president of the European Central Bank, Christine Lagarde, warned that a new increase in the base rate of the euro by 0.5 percentage points is very likely in March.
The increase in core inflation poses new dilemmas for the Bank of Albania as well. The slowdown of core inflation in the last quarter of 2022 and even its decline during the month of November allowed the Bank of Albania to take a "pause" on the path of monetary normalization.
In the meetings of the Supervisory Council, the Bank of Albania has kept the base rate unchanged at 2.75%, after having increased it three times in a row by 0.5% in the previous meetings. This inhibition gave a kind of breathing space to the financial market and especially to the primary market of bonds and bonds of the Albanian Government.
From the month of December, the yields started a downward correction, after the very rapid growth they had experienced especially in the August-November period. But the rise in core inflation is a signal that perhaps interest rate hikes should resume soon.
The Bank of Albania has made it clear that controlling inflation and reducing it near the 3% target will require a further increase in interest rates, but the timing of interventions will depend on new data, among which inflation base is one of the most important.
INSTAT data showed that for the month of January, the average inflation in the economy fell for the third month in a row, going down to 7.2%, against a maximum level of 8.3% recorded in October 2022.
But, a similar decline is not being registered in the basic component of inflation and this brings back concerns for the central bank, especially for the so-called second round effects.
Although the Bank of Albania partially explains it with the methodology used, such a high level of core inflation raises the concern that the inflationary shock to supply is being transmitted to wages and other production costs and may generate new inflationary pressures in the future.
For Albania, the inflationary wave that originated from foreign markets is combining with a delicate situation in the labor market, where the lack of labor in many sectors is increasing the pressure on businesses to raise wages.
The average gross salary in the private sector for quarter III 2022 increased by 12.3% compared to the same period a year ago. /Monitor
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