Deflation, i.e. the decline in prices is a phenomenon of conflicting aftereffects. On the one hand the drop in prices should be welcomed by consumers, meaning they spend more money on goods and services. On the other, deflation points in quite the opposite direction – a lower demand and less buyers, which on its part means a decline in business.

In February 2016, the National Statistical Institute once again registered deflation in Bulgaria, as it has for the past two years, but this has not made consumers happy nor have businesses registered any tangible drop in their turnover. Apparently everyone has adapted and is taking the drop in prices for granted. All the more so that households frequently do not get to feel the effect of the lower prices, as while the cost of some commodities has been going down, others have been going up, balancing out the consumer basket.

In light of this, even though consumer prices are discouraging to businesses, the 6 percent GDP growth last year – a record high in six years – came as a pleasant surprise. The reason behind it is most of all the increase in exports, but what would the GDP growth have been if there was even a modicum of stimulating inflation?

The principal cause of the deflation is the drop in oil prices and other energy resources on the world market. Europe’s second lowest fuel prices at filling stations have now been registered, here in Bulgaria. This price reduction has also affected the prices of gas which are yet to drop by another one quarter in the months to come. This will have a domino effect on other kinds of energy, more specifically electric and thermal energy, which are highly dependent on the price of gas and this, in turn, will mean further deflation.

Yet, the annual forecasts of the Ministry of Finance and the Bulgarian National Bank are for a low inflation rate of 2 percent. Where it will come from is difficult to say – that it may come from higher consumer demand is hardly likely as Bulgarians’ purchasing power is very low and whatever money they may have, they prefer to keep in banks even though deposit interest rates are negative. Evidently, higher demand for Bulgarian commodities and hence, a slight rise in prices is to be expected only in exports. Exports have been going up and pushing the economy forward. Yet it is obvious this will not be enough – practically all observers and experts say that this year the Gross Domestic Product of Bulgaria will not reach last year’s growth rate levels and will remain below 3 percent. Deflation is eating away at growth.

English version: Milena Daynova