ARMENIA'S INFLATIONARY START TO 2005

UNCLAS YEREVAN 000235

SIPDIS

EUR FOR CACEN

E.O. 12958: N/A
TAGS: ECON EFIN AM
SUBJECT: ARMENIA'S INFLATIONARY START TO 2005


1. Armenia's Consumer Price Index (CPI) rose 5.4 percent in
the month of January, exceeding in one month the
government's target for the entire year. Press reports cite
a senior National Statistics Service official who claims
that the rise in the CPI is due to an 8.4 percent rise in
the prices of foodstuffs, which compose over 70 percent of
the consumer basket. While Armenia's high winter inflation
is typically offset by seasonal deflation during the summer,
this January's inflation rate is twice that of January 2004
(2.5 percent),itself the beginning of an inflationary year.


2. Armenia's consumption basket is based heavily on
imported basic food products. Inflation in Armenia is
therefore sensitive to the world prices of food, especially
grains, differences in transit costs, which vary seasonally,
and currency fluctuations. Armenia's geopolitical isolation
makes it especially vulnerable to rising costs or
restrictions on the few trade routes in and out of the
country. The Central Bank blamed surges in the price of
wheat for last year's inflation of 7 percent, well above the
government's 3 percent target.


3. Inflation was high in 2004 and in the first month of
2005 despite a dramatic appreciation (20 percent) in the
Armenian national currency, the Dram, against the U.S.
dollar and Euro. The Dram's appreciation should have eased
inflationary pressure by making imports cheaper in the
national currency. Comment: If the current inflationary
trends continue but the Dram fails to appreciate against the
dollar, inflation in 2005 could well exceed the high levels
of 2003 and 2004.
EVANS