US embassy cable - 05YEREVAN235

UNCLAS YEREVAN 000235 
 
SIPDIS 
 
EUR FOR CACEN 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, AM 
SUBJECT: ARMENIA'S INFLATIONARY START TO 2005 
 
1.  Armenia's Consumer Price Index (CPI) rose 5.4 percent in 
the month of January, exceeding in one month the 
government's target for the entire year.  Press reports cite 
a senior National Statistics Service official who claims 
that the rise in the CPI is due to an 8.4 percent rise in 
the prices of foodstuffs, which compose over 70 percent of 
the consumer basket.  While Armenia's high winter inflation 
is typically offset by seasonal deflation during the summer, 
this January's inflation rate is twice that of January 2004 
(2.5 percent), itself the beginning of an inflationary year. 
 
2.  Armenia's consumption basket is based heavily on 
imported basic food products.  Inflation in Armenia is 
therefore sensitive to the world prices of food, especially 
grains, differences in transit costs, which vary seasonally, 
and currency fluctuations.  Armenia's geopolitical isolation 
makes it especially vulnerable to rising costs or 
restrictions on the few trade routes in and out of the 
country.  The Central Bank blamed surges in the price of 
wheat for last year's inflation of 7 percent, well above the 
government's 3 percent target. 
 
3.  Inflation was high in 2004 and in the first month of 
2005 despite a dramatic appreciation (20 percent) in the 
Armenian national currency, the Dram, against the U.S. 
dollar and Euro.  The Dram's appreciation should have eased 
inflationary pressure by making imports cheaper in the 
national currency.  Comment:  If the current inflationary 
trends continue but the Dram fails to appreciate against the 
dollar, inflation in 2005 could well exceed the high levels 
of 2003 and 2004. 
EVANS