Inflation, consumption, economic growth and impacts in 2024

In the January 10, 2024 publication of the consumer price index (inflation) for December 2023, it is noted that its rate in December 2023 is 4.0% compared to the previous year. In December 2022, the inflation rate was 7.4%. The average annual price increase in 2023 is 4.8% from 6.7% in 2022.

Compared to December 2020, prices have increased by an average of 15.8%. This means that from the effect of price increases the average cost of living has increased by more than 15.8%, as there is another focus from inflation [1].

The biggest price increase is for food and non-alcoholic beverages by 29.6%, hotels, cafes and restaurants have increased by 13.5%, maintenance, furniture and electrical appliances have increased by 12.6%, alcoholic beverages and tobacco have increased by 12.4%, transport has increased by 11.8%, tourist services (entertainment and fashion) have increased by 11.3%, clothing and shoes have increased by 8.7% and rent and fuel prices by 7.5%.

If we look at the level of inflation in December 2022 compared to December 2020, the average increase is 11.4%, where food and non-alcoholic beverages have increased by 21.4% and transport by 15.6%. Other goods and services rose between 2.8% and 8.7% [2].

Meanwhile, when we look at the level of inflation in December 2021 compared to December 2020, the average increase is 3.7%, where food and non-alcoholic beverages have increased by 6.4% and transport by 9%. Other goods and services rose between 0.5% and 4.2% [3].

Even the volume of various goods and services in December 2021 has a slight decrease of 0.3% from a year ago.

An impact of inflation on consumption seems not to have had its effect on its decline, until the third quarter of 2023, where specifically:

For the year 2021, the final consumption of the population [4] increased by 5.06%, compared to the year 2020 [5]

For the first quarter of 2022, compared to the first quarter of 2021, the final consumption of the population increased by 8.63% [6].

For the second quarter of 2022, compared to the second quarter of 2021, the final consumption of the population increased by 8.95% [7].

For the third quarter of 2022, compared to the third quarter of 2021, the final consumption of the population increased by 8.09% [8].

For the fourth quarter of 2022, compared to the fourth quarter of 2021, the final consumption of the population increased by 4.49% [9].

For the first quarter of 2023, compared to the first quarter of 2022, the final consumption of the population, which constitutes the main share of expenses in the economy, increased by 3.05% [10].

For the second quarter of 2023, compared to the second quarter of 2022, the final consumption of the population increased by 4.03% [11]].

For the third quarter of 2023, compared to the third quarter of 2022, the final consumption of the population decreased by 0.53% [12].

How does the relationship between inflation and final consumption of the population (final consumption) work and influence?

As a rule in developed economies, since inflation increases the cost of living, it affects the decrease in the income level of families and consequently causes a decrease in consumption expenditures. Thus, the situation of rising prices directly affects the income of families and their spending capacity, affecting the decline in purchasing power and consumption.

In a review of this logic that occurs in countries with a developed economy, low informality and lower corruption than Albania, it can be seen that unlike the consumer logic of the market in these countries, the presence of informality softened the inflationary pressures that come from demand and financial shocks . This softening effect may not directly affect the purchasing power, as long as the increased cost due to inflation is also amortized by the presence of remittances [13] from abroad to help consumption. Money sent from abroad is a large measure does not have the same impact on the perception of inflation compared to that which is earned through labor or capital.

This argument is based precisely on the increase in population consumption in the years 2021 and 2022. This increase influenced by informality, remittances and market optimism after the pandemic period have maintained a valuable level in the impact of economic growth, which is mainly based on consumption of the population.

The prolongation of inflation and its tendency to continue in 2024 directly affected a decline in the consumer trend in 2023. In this year, the increase in prices, although lower than in 2022, continued to be influenced by a devaluation. of the Euro, which affects the value of money of Albanian consumers. Thus, 57% of the money deposited in banks at the country level is in euros and other foreign currencies. The loss of their purchasing power and the presence of still high inflation has had the effect of reducing consumption for goods and services that are not necessary and increased vigilance to better control and manage individual and family portfolios.

Meanwhile, over half of the Albanian economy interacts with foreign currencies and this mainly affects the consumption of the population in 2023 due to uncertainty about the future.

How much of an impact does inflation have on household income around the poverty level?

First let’s look at the impact of inflation on pensions and the value of their indexation

Compared to December 2020, pensions for the years 2021 – 2023 have been indexed (increased) on average by a total of 14.3% [14],, resulting in an average difference between price increases and pension indexation of 1.5% on average.

This small difference is equal to the value of 400 ALL for each pensioner. The government is giving this difference that comes from the non-extension of the data for the calculation under the name of bonus every December by equating the average increase in inflation with the average indexation of pensions.

When we calculate the nature of the expenses of a pensioner family, where the value of food expenses, household expenses together with health expenses account for more than 70% of the total monthly expenses, then the inflation for these three groups of expenses is no longer as above but goes to 21.2 %. Now the impact of the inflation increase on pensioners’ families is at least 3% more than the calculation above. From all this calculation we see that it is necessary to find the right mechanisms for a higher indexing than the methodology used to date [15].

Second, from a look at the impact of inflation on families with increased minimum wages in 2023 and the effect of coping with them, it seems to be at unsatisfactory levels, if we consider the increase in future costs..

The minimum wage increase in the time period 2021 – 2023 has increased by 33.3% in an upward curve from 30 thousand ALL in 2021 to 40 thousand ALL in 2023 (increase of 10 thousand ALL per month per employee).

Based on the impact of inflation, it can be seen that the average expenses of families with 4 people have increased on average by 15.8% in the same time frame as above (increase by 12 thousand ALL per month).

All the nature of a family’s expenses are included in this increase in expenses.

If we calculate a family that is based on income from work and where two employees receive this minimum wage, then from the comparison between the increase in the minimum wage and the increase in monthly expenses of the family due to inflation, the calculations show a real increase in the purchasing power of the salary minimum of 11.7%. This growth, which is being further eroded by inflation, which continues to have a tendency to remain high even at the beginning of 2024, is significantly affecting the increase in the cost of living, which is strongly influenced by the value of food and expenses. other basic.

If we make a similar calculation for the middle salary level category (40 thousand to 90 thousand ALL), the impact of inflation on the level of increased salaries affects less than 10% of their increase for the public sector and close to 12% of their growth for the private sector.

What about businesses, how are they affected by inflation and facing rising costs?

Inflation in 2023 affected all businesses on the supply side, with the costs of materials, raw materials and products rising, albeit moderately compared to food. But the increase in transport costs, due to interference in the freedom of the market since the government’s decision in 2022, as well as the uncertainty of market prices abroad could affect the costs related to trade and this approach has directly affected importers as well. , which also encouraged by the informal market unmolested by anti-evasion institutions did not reflect a large price reduction. On the other hand, a misleading and unclear fiscal policy from the supply side had the effect of curbing the downward trend in prices.

While on the demand side, this approach of importers has also resulted in a drop in imports, due to the drop in consumer demand in 2023 [16]. Following the impact on the demand side, it seems that the market and businesses were affected by the lack of coordinated policies to strengthen the market and the value of work in function of increased productivity and as a result, layoffs followed and an increase in the demand for employees who are still part of the market for higher wages, where in this case the impact of the unilateral increase in the minimum wage and the average wages of the public sector is also included. These higher costs continue to be transferred to consumers through higher prices, but also the uncertainty of the market as to how it will continue to respond to consumer demand for the future.

Thus, on the one hand, manufacturing businesses and specifically those for export are the most exposed in 2024 to the season of a financial crisis, which can directly affect increased pressure on the budget for the increase of social expenses. On the other hand, the drop in profit to low and almost historical levels is encouraging the departure of capital abroad, as well as stopping the growth of fixed capital [17], a factor with a negative impact on future production.

Taken together, all the indicators are signaling a continuation of the slow economic growth trends for 2024 and consequently the well-being of the population and its redistribution in every segment that needs it immediately.

 

[1] With the increase in the cost of goods and services, the purchasing power of the lek falls. The rate of inflation is often measured by the change in the Consumer Price Index (CPI), a monthly measurement that averages the cost of a standard basket of goods and services from areas across the country.
The inflation-adjusted cost of living represents the average cost of an accepted standard of living including food, housing, transportation, taxes, and health care. The cost of living is compared to the minimum income needed to live in different cities, which have different prices.

[2] https://www.instat.gov.al/media/11147/ick_dhjetor_2022.pdf

[3] https://www.instat.gov.al/media/9467/ick_dhjetor_2021.pdf

[4] Household final consumption expenditure covers all purchases made by resident households (in Albania or abroad) to meet their daily needs, such as: food, clothing, housing (rent), energy, transport, durable goods (especially car), expenses for health, free time and for various services.

[5] https://www.instat.gov.al/media/11413/produkti-i-brendshëm-bruto-final-2020-dhe-gjysmë-final-2021.pdf

[6] https://www.instat.gov.al/media/10255/pbb-tr1-2022.pdf

[7] https://www.instat.gov.al/media/10547/pbb-tr2-2022.pdf

[8] https://www.instat.gov.al/media/11117/pbb-tr3-2022.pdf

[9] https://www.instat.gov.al/media/11407/pbb-tr4-2022.pdf

[10] https://www.instat.gov.al/media/11807/pbb-tr1-2023.pdf

[11] https://www.instat.gov.al/media/12617/pbb-tr2-2023.pdf

[12] https://www.instat.gov.al/media/12905/pbb-tr3-2023.pdf

[13] In 2021, remittances were 761 million euros, in 2022 they increased by 58% and reached the input value of 1.2 billion euros in the Albanian economy, and in the 9th month of 2023 they continued at high values and similar to 2022, reaching 1 billion Euros

[14] 2.7% in 2021, 9.5% in 2022 and 8.6% in 2023, but since they benefited from October 2023, the direct effect is only 2.3%

[15] https://faktoje.al/indeksimi-i-pensioneve-nje-e-drejte-e-parealizuar-sa-duhet/

[16] https://www.instat.gov.al/media/12880/tj-nentor2023.pdf

[17] The gross formation of fixed capital recorded a decrease of 2.81% in the third quarter of 2023, although there is an increase in the two previous quarters