The Economist print edition
London, UK
Story from Warsaw, Poland
January 23, 2003

UKRAINE knows the ravages of hyper-inflation. In the early 1990s reckless fiscal and monetary policies drove inflation to 10,000%, wrecking the country's first post-communist currency and wreaking enormous economic damage. But in the past three years GDP has grown by one-fifth. Inflation has been crushed. Last year prices fell by 0.6%.

Other ex-communist countries have similar stories. In Bulgaria inflation dropped from 1,000% in 1997, when it adopted a currency board to stabilise its currency, to just over 3% last year. Poland, a sufferer from hyper-inflation in 1990, still had double-digit inflation in 2000. Yet in the year to December consumer prices rose by only 0.8%. The Czech Republic's inflation rate is even lower, at 0.6%.

The main causes of falling inflation have been soaring currencies and tumbling prices for food and (until last year) oil, which account for a bigger share of the region's consumer-price indices than of those in richer countries. Inflows of speculative capital have pushed currencies up, and harvests have been strong.

The importance of seasonal and external influences on inflation, and uncertainty over the timing and size of government-regulated price increases have meant that central bankers have not been spared sleepless nights. Poland's central bank, in particular, has struggled to establish its credibility. It undershot its inflation target last year for the second year running, having overshot it in 1999 and 2000.

In Hungary, where inflation is 4.8%, rampant by current standards, interest rates have been a few percentage points higher than in neighbouring countries. After the forint was pushed to the top of its permitted range against the euro, the central bank cut rates on January 15th.

It may be too soon to sound the death knell for inflation. As central and eastern European economies catch up with western ones, prices of non-tradable things; mainly services;ought in theory to rise more quickly than in the west. Vulnerability to external shocks, such as sharp movements in currencies or oil prices, could push inflation up as easily as down.

For all that, the home-grown risks of double-digit inflation have been sharply reduced, especially in the countries now on the threshold of the European Union. Although burgeoning budget deficits and political pressure on central banks pose a threat, the EU's Maastricht criteria for adopting the euro will help keep these in check. And policymakers deserve a pat on the back for lowering inflation, however fortuitously.