We expect inflation pressures to continue to moderate in the near term, pick up toward the end of the year, and remain at just above 4.0% through 2025. The inflation rate this year will end at 3.8% and next year he thinks it will be 4.1%. The main drivers of upward pressure on prices are the recovery in real wages and domestic demand, the tightening of the labor market, and the expected introduction of the euro in 2025.
Regarding demand-driven price pressures, we believe the overall lag effect from recent minimum wage increases and last year's return to historic levels in real wage growth will provide support. With emerging market growth dynamics at play and multiple infrastructure and modernization projects being implemented simultaneously, the impact on excess capacity and businesses should be consistent with upward pressures on inflation. Moreover, in the labor market, this growth boost should stimulate demand for both blue-collar and white-collar workers. This should at least ease the recent rise in unemployment (5.8% in January – still low by historical standards) and keep unemployment tight. We expect this to continue to support healthy real wage growth until as early as 2025, and as long as governments are able to absorb EU funds and launch new investment projects. .
There have also been notable developments on the fiscal front. The recent increase in taxes on large companies and the removal of the previous value-added tax cut throughout the year should also, in principle, stimulate price pressures, especially as the economy is forced into an acceleration phase. More specifically, a reduction in the VAT rate for tour operators and sporting events (from 20% to 9%) and zero VAT on bread and flour in the wake of the coronavirus will be effective from 30 June this year. ends at This will further intensify price pressure in the second half of 2024. Similarly, the repeal of similar VAT breaks for restaurants and catering services is also scheduled to end on December 31st, leading to faster service inflation into 2025.
When it comes to international market developments, one of the major differences between the National Bank of Bulgaria's (NBB) assumptions and ours relates to oil prices. In its previous report, NBB predicted a decline in oil prices this year. We still assume that prices will remain at current levels on average throughout the year.
Finally, regarding inflation, we cannot exclude the possibility of some kind of price gouging as the date of official introduction of the euro approaches. In fact, prices should, in principle, be kept under control due to the long-standing policy of pegging the lev and the euro, government efforts to require dual pricing in stores, and lower currency conversion costs for businesses due to the introduction of the euro. However, the overall growth acceleration and tax increase situation described above is necessary for at least some companies to seize the opportunity and revise their entire “menu” in both LEV and EUR, in line with the dual pricing method. It can give you confidence.
Taken together, we believe these factors will combine to cause price pressures to be higher than consensus and BNB assumes.
