The Economist print edition
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
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.
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