Inflation and Adjustment of Relative Prices in Georgia

Abstract

The paper focuses on the dynamics of relative prices of goods and services in Georgia in the period of relative macroeconomic stabilization i.e., in years 1996–2001. Structure of Georgian consumer price index (CPI) is described in details and an analysis of the dynamics of relative prices is presented. It is shown that inflation is positively correlated with the variability of relative prices as measured by the standard deviation of the distribution of prices and also with the third moment (skewness) of the overall distribution of prices. Consequently, the efforts to minimize relative price variability should be considered an important part of anti-inflationary policy (the main recommendation for conducting anti-inflationary policy should include frequent increases of administratively regulated prices slightly in excess of overall inflation so that upward adjustments can take place without inducing large price variability). Moreover, based on the examination of basic 8 groups of goods and services and 56 subgroups included into basket used for CPI computation, it is shown that in the period under study the general price level increased mainly due to the increase in prices of goods with administrative regulated prices (except "alcoholic beverages"). In contrary, free market prices for food and beverages (except "fruits and vegetables") and other goods and services (except "personal care and effects") increased much less than the general price level in the country, i.e., relatively decreased.