Do the official inflation figures reflect reality?

According to official data, annual inflation in Azerbaijan has dropped below 1%. The consumer price index for January-April of this year amounted to 100.7% compared to the same period in 2023, including 99.3% for food, beverages and tobacco products, 101.3% for non-food products, and 102.4% for paid services provided to the population, the information published by the State Statistics Committee. 

But to what extent does this reflect reality?

Economist Farid Mehralizadeh answers questions from ASTNA on this topic.

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Question: The annual inflation rate in Azerbaijan has dropped below 1%. Is it plausible?

Answer: The increase in inflation in Azerbaijan occurred after the outbreak of the pandemic – in 2020. High inflation has been recorded in the country for the last three years in a row. According to official data, inflation in Azerbaijan was recorded at 6.7% in 2021, 13.9% in 2022, and 8.8% in 2023. It should be borne in mind that the target range of the Central Bank in connection with inflation is in the range of 2-6%. In other words, the inflation recorded in Azerbaijan over the past three years turned out to be higher than the government's target. And by the end of last year, there was a decrease in inflation rates. In this regard, it should be borne in mind that the low inflation figures published now show a difference compared to last year. In other words, similar trends have been observed in the global economy over the past year. However, when we look at price increases over a relatively broader time frame, a different picture is created. For example, data from the State Statistics Committee (SSC) show that, compared with the same period in 2020, the inflation rate is higher by more than 30%. From this point of view, the decrease in inflation compared to last year does not mean that the negative effects of inflation have disappeared. Because over the previous three years, high inflation rates had a serious impact on the socio-economic well-being of the population. From this point of view, although the current decline in inflation is good news, it does not mean that the problems caused by inflation will disappear.

Question: To what extent does the current officially announced inflation rate in Azerbaijan reflect reality?

Answer: There are always questions among independent economists about the inflation figures released by the SSC. The basket used to measure inflation in Azerbaijan includes more than 500 goods and services. The SSC has released a list of products and services that it uses to measure inflation. However, the specific weight of products in the basket used to measure inflation has not been disclosed. This is one of the main problems associated with calculating inflation in Azerbaijan. Independent experts do not know by what percentages certain products in the basket are considered when calculating inflation. The unavailability of this information may give the statistical authority additional opportunities to conceal the real inflation rate. Thus, by reducing the proportion of products with higher prices, it is possible to underestimate the inflation rate.  Therefore, in order to ensure transparency in the calculation of inflation, I consider it important to disclose the specific weight of goods included in the inflation basket. Another point that deserves attention from the point of view of transparency in calculating inflation is that the names of shopping malls whose prices are added up when calculating inflation, as well as the prices of different brands of the same product, are not disclosed. It would be more correct if the SSC indicated which objects it monitors prices for and which brands it takes as a basis.

Another important point is related to the large number of products and services used in Azerbaijan to measure inflation. In Azerbaijan, their number is approaching 600. In developed countries, it is about 20-30% less. To calculate the real inflation rate, it is more profitable to consider the products most consumed by the population. 

There is also the fact that price monitoring to measure inflation in Azerbaijan is carried out three times a month – every 10 days. In the practice of developed countries, this period is shorter. Improving the efficiency of price monitoring can also be considered important from the point of view of calculating real inflation. All of the above indicates that there are serious challenges in Azerbaijan in connection with the calculation of inflation, and until these problems disappear, issues related to the transparency of official inflation will also remain open. In order to find out the real level of inflation in the country and create adequate policy mechanisms, it is necessary first of all to eliminate these problems.

Question: Are there alternative computing centers in Azerbaijan that measure the inflation rate? If not, for what reason?

Answer: There were several attempts by representatives of independent civil society to carry out alternative measurements of inflation in Azerbaijan, but it was not possible to ensure the duration of these attempts. Because in reality, in order to calculate alternative inflation indicators, this process must cover the entire territory of the country. And for the organization of independent price monitoring throughout the country, a serious human and financial resource is required. Unfortunately, the resources of independent civil society in Azerbaijan are not so large that it would be possible to organize an alternative price monitoring process that would cover the entire territory of the country. Therefore, methodological studies are mainly conducted in the country in connection with the calculation of inflation. The problem associated with the activities of civil society in the country deprives society of the opportunity to gain added value in such matters.

Question: What steps should be taken to avoid inflation?

Answer: According to official data, food expenses in Azerbaijan account for more than half of the population's expenses. In fact, the fact that food products account for a large share of the population's expenses indicates that most people's incomes are at best sufficient to cover food costs. Therefore, the growth of food inflation in the country causes serious damage to the well-being of the population. Governments have many alternatives to deal with high inflation. First of all, the possibility of influencing prices through customs and tax policy comes to mind. If you remember, when high inflation was recorded in Azerbaijan, government representatives stated that high inflation is imported to Azerbaijan, that is, prices are rising due to rising prices in foreign countries. In itself, this idea is correct. But in response, the government could at least temporarily reduce or cancel customs tariffs on the most important consumer goods.

The same step can be taken with respect to value added tax. That is, a decrease in customs and tax rates may indirectly lead to a decrease in the cost of production, rather than an increase in its price. However, we did not see the widespread use of tax and customs rates by the government in that period to influence prices.   In the conclusion of the Accounts Chamber regarding the budget for 2022, it was also noted that inflation was the reason for the excess of customs duties in Azerbaijan over the planned ones. Due to the price increase, the customs authorities received an additional 1 billion manats in addition to the plan. The government could use these funds in the form of tax or customs benefits and reduce price increases.

I believe that the growth of productivity and production in agriculture in the country can also protect the market from external factors to some extent. However, due to natural reasons, no country can produce all the products it needs on its own. But at least a steady increase in domestic production of certain types of products can affect inflationary imports from abroad. Another important point is related to increased competition in the country's business sector. Despite the fact that there are many markets with different names in Azerbaijan, the number of their main companies is not so large. In this regard, the improvement of competitive opportunities in the market, both from the point of view of importing products into the country and from the point of view of sales, may indirectly affect the price level.

We must not forget that for a long time international economic organizations, within the framework of the policy of combating inflation, have considered necessary not only steps to reduce prices, but also to increase incomes of the population. Therefore, the growth of incomes of the population in Azerbaijan can also be considered as an anti-inflationary policy. To do this, the government can take certain steps. It is very important to increase social benefits from the budget and set the minimum limits correctly. In Azerbaijan, both the living wage and the minimum wage are insufficient to meet the real minimum needs of the population. Although flexible regulation of these indicators and bringing them in line with the real minimum needs of the population can have a significant impact on the social situation of the population.

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