The National Statistical Institute reported a second consecutive month of price declines. Monthly inflation in Bulgaria stood at 0.2% in May 2024, down from 0.3% in April 2024. Annual inflation in May 2024 was 2.3% based on the national calculation method and 2.7% based on the harmonized consumer price index applied by Eurostat to all EU member states, Rachezar Bogdanov, chief economist at the Institute of Market Economics (IME), said in an analysis published on the IME website last Friday.
Bogdanov drew some conclusions from the data and outlined some trends. He said that while prices have clearly stabilized over the past few months, Bulgaria's average annual inflation rate was 5.1% as of May, far from meeting one of the key requirements for joining the eurozone. Countries whose inflation rates could serve as a reference for determining the average annual inflation threshold for May range from 1.9% to 2.7%. Even with the allowable additional 1.5 percentage points, Bulgaria's level would still remain high.
Nevertheless, analysts see a clear trend of Bulgarian inflation approaching the euro area average level. Looking at the average annual rate, it is already 5.1% in Bulgaria and 3.4% in the euro area, which stood at 14.1% and 8.8%, respectively, in March 2024. All this is a logical consequence of the strong inertia behind the average annual inflation rate, which shows the trend of prices for 12 consecutive months.
However, if we take into account the monthly values of annual inflation, Bogdanov says that for the past two months, Bulgaria's level was almost on par with that of the euro area. A significant “divergence” began at the end of 2021, the difference became quite large in the fall of 2022, after which the rates began to converge again. In fact, the inflation rate in the euro area in the first five months of 2024 was 1.8%, while in Bulgaria it was only 0.6% (one third). In short, after the 2022 shock, the behavior of economic actors normalized and the market narrowed the gap between Bulgaria and the rest of the continent. The gap has been steadily shrinking since January 2023, which means that it took 16 months for Bulgaria to return to the average price volatility rate of the euro area.
The inflation trends are analyzed as reflecting the differences in the structure and openness of the economies of European countries, as well as in the composition and income of their consumers. The cycle of inflationary surge began with a sharp rise in energy (electricity, natural gas, liquid fuels) prices. Russia's war in Ukraine gave further impetus to this process, pushing up the prices of other raw materials and agricultural products. This in turn spread to consumer prices of food and other goods. Finally, the impact of rising raw material prices and, especially, wage increases led to a visible rise in services.
The easing of inflation occurred in the same sequence: first energy prices fell, then food prices stabilized, with food prices falling in Bulgaria for three months, and relatively high inflation remaining only in the service sector.In terms of risks, Bulgaria's labor costs continue to grow three to four times faster (17% year-on-year in March 2024) than in larger, more developed economies in Western Europe, Bogdanov said.
