Base inflation started 2024 with further decline and dropped to the lowest level in two years.
According to calculations by the Bank of Albania, for the month of January, the annual base inflation dropped to 2.9%, from 3.2% in December and 8.74% in January of the previous year. Base inflation has experienced a decline for the twelfth consecutive month and reached the lowest level since February 2022.
While overall consumer price inflation also declined in January to 3.4%, base inflation has been confirmed at even lower levels, even below the Central Bank’s target.
Base inflation is an indicator calculated by the Bank of Albania on more than 69.2% of the overall Consumer Price Index basket. Base inflation measures changes in consumer prices, excluding products that are inherently volatile, mainly food and energy products. The purpose of base inflation is to strip out the overall price growth from the effects of supply shocks or other short-term influencing factors.
Base inflation is showing even better trends than forecasts, theoretically signaling a decrease in sustainable inflationary pressures in the economy. So far, the figures are moving in the right direction and seem to support the line followed by the Bank of Albania to not further increase interest rates. The base interest rate in Albania remains at 3.25%, one of the lowest levels in Europe.
However, despite encouraging signals from inflation, especially base inflation, in the latest Monetary Policy Report published last week, the Bank of Albania assessed that the risks of rising prices in the Albanian economy are increasing.
According to the Monetary Policy Report, particularly new pressures for the rise in oil and food prices in the presence of regional conflicts present new risks for higher global inflation but also for the emergence of second-round effects in the form of rising inflation expectations.
Alongside this, pressures from the domestic labor market in Albania may prove stronger and more sustained, pushing upward the projected trajectory of inflation.
According to the Bank of Albania, employment has continued to rise, and the unemployment rate has fallen, while production, labor, and capacity utilization gaps remain positive. The tight labor market has continued to drive wage growth in the private sector.
In line with the above analysis and forecasts, the Supervisory Council at the meeting on February 7 decided to keep the base interest rate unchanged. However, in its statement, the Council emphasized that the sustainability of internal inflationary pressures and risks from the upward direction of inflation require continuous monitoring of the situation and timely response by monetary policy to ensure the respect of the price stability objective.
