The Ameco database includes a very helpful series of ‘Contribution to the change of the final demand deflator’ by category of final demand. This breakdown can be used to examine inflation dynamics in Greece since 1990 and especially during the Euro era. I ‘ve chosen not to include 2009 in averaging since it contains outliers due to the recession:
A few clear conclusions are the following:
- Inflation dynamics during the ’90s were not the result of the external sector but rather of high claims of the domestic sector (workers and corporations) on output. The disinflation of that period was an attempt to lower these claims by anchoring inflationary expectations closer to the Euro average. Overall, this attempt was successful as is evident in the following graph:
- During the boom years of 2000 – 2008, the foreign sector, ULC and Groos Operating Surplus contributed almost equally (with a small residual for net indirect taxes) to inflation dynamics. ULC only contributed 1/3 which means that the relationship between the ULC and the CPI based REER is rather weak, especially if one takes into account the large credit expansion of the corresponding period and the high increases in asset prices (which makes consumption more a function of wealth and access to easy credit than of current discretionary income). Moreover, the Nominal EER contribution was actually negative which made foreign goods less expensive and led to a loss of competitiveness.
- After 2009, the fall in ULC is quite substantial (a total contribution of -5,75%) with the nominal EER also helping in the fall of inflation. On the other hand, import prices contributed strongly to domestic inflation (especially during 2011) while firms seem to be able to extract an increasing claim out of nominal output with a large ‘regime change’ after 2010 (the contribution was essentially zero during 2009 – 2010). It is not clear if this phenomenon should be attributed to low competition or an attempt by firms to survive since their lack of access to bank credit makes sales the only available source of funds.
Overall, the attempt to lower the CPI-based REER (and also ease the burden on labor by lowering the general price level) requires that firms decrease their nominal claims. It is not quite clear if that requires an increase of competition in product markets or renewed access to bank credit (in my view this is an excellent topic of further research).
One more interesting element is the price change (computed through price deflators) of Greek goods imports and exports:
It is clear that export prices follow import prices very closely (correlation coefficient equal to 0.907 with R² of 0.82). The fact that fuel is a large part of both exports and imports probably plays a major role. In any case, the reasonable conclusion is that exports have a large import content (something which could be verified through an Input-Output table analysis) making their pricing largely a function of import prices. That lowers the importance of ULC quite a lot, since they do not seem to explain a large part of export price changes.