Prices driven up 2.6% by VAT hike in July

Prices climbed by 2.6% in July because of the VAT raise by five percent, with the annual inflation soaring to 7.1% from 4.4% in June, show data from the National Statistics Institute. Food became 1.9% more expensive, while non-food prices rose 3.1%.

Previous analyst forecasts indicated an average 2.9% price increase, whilst calculations on the impact of a full transfer of the VAT increase into end prices point to a 4.2% monthly inflation. The VAT increase, however, overlapped with the decline in consumers’ purchasing power, so economic operators did not pass on the full shock of the VAT raise to customers.
“The inflation rate was a pleasant surprise in July. The fact that the VAT increase was not entirely transferred to consumer prices is due to weak private consumption, which offset the abrupt modification of the taxation system. Some retailers decided to bear the VAT increase instead of transferring the shock to customers by raising prices,” commented Eugen Șinca, analyst within BCR’s research department.
The biggest price increases were recorded in July for cigarettes (9.5%), fruit (6.6%) and water, sewerage, and sanitation services (5.3%). On the other hand, the price of aeroplane tickets fell 4.5%. Vegetable prices fell 1% and egg prices by 0.5%.