By Chrysostomos Tsoufis

All this time that we at have been studying food inflation and fluctuations in product prices, never before has the picture compared to our partners in the Eurozone been so encouraging.

According to Eurostat, food inflation in Greece closed in October at 1% compared to 1.9% in the Eurozone, with the country registering the 6th lowest price! Who would have thought that the inflation of olive oil which overwhelmingly determines national food inflation at (only) 18.1% would be the 5th lowest in the Eurozone!

If we exclude some areas of concern such as fish and seafood where traditionally Greece is in the first places (in October 4th) meats where inflation is more than twice the Community average { 2.1% against 1% } and wine where we are in 5th place in all other categories, our country has a much better image than the average:

Product Greece Eurozone

Milk -5.2% 1.2%
Yogurt -3.2% 0.1%
Cheese -4.4% 0.4%
Egg -0.6% -0.4%
Fruit -1.8% 1.9%
Potatoes -0.1% 0.6%
Sugar -22.4% -10%
Coffee -2.2% 4.5%
Bread 1.2% 1.5%
Lamb 3.5% 5%

At the same time, in the public sphere, the debate surrounding the need or not to reduce the VAT is gaining ground again, with PASOK mainly and SYRIZA secondarily putting pressure on the government. Government, which has made it clear that in its targeting of the second round of tax reductions it is planning, indirect taxes have no place, or at least they do not have a central place and why they cost and why the reductions are not ultimately passed on to consumers.

The first argument is not disputed by anyone. 2 VAT reduction units as proposed by PASOK cost €3 billion which is a lot of money. That is why the official opposition is now also proposing accompanying extraordinary contributions to company dividends and surplus profits as the bankers call them.

The second question and whether or not the reductions in product prices are diffused, the Budget Office of the Parliament has given an answer which probably went through the cracks even by the government officials.

The Office’s economists examined the international literature on VAT changes (increases and decreases) in 27 countries from 1996 to 2015 and the findings are typical:

  • Only 6% of VAT reductions are spilled over to final prices and only in the short term, the remaining 94% are lost from the first moment in the supply chain. In contrast to VAT increases, the level of diffusion in the final price reaches 34%. This implies that in some cases where the reduction of VAT is followed by a corresponding increase, prices increase disproportionately, a fact that is at the expense of the consumer.
  • And this small price reduction in the cases of VAT reduction is temporary as according to the international literature, after a period of 10 months on average, prices return to where they were.

Especially for Spain, which the opposition uses as an example to emulate, the studies are numerous and most show that over time, the measure has lost its momentum.

The Bank of Spain calculated that for products where the VAT rate was reduced from 10% to 5%, in the first 2.5 months the diffusion reached 90% before falling a few weeks later to 70%. The picture is worse for the products in which the VAT fell to 0 with an initial diffusion to 70% and immediately after a drop to 50%.

Similar to the findings of the corresponding study of the Autonomous University of Madrid which initially observes a significant effect of the VAT reduction in the first 2 months which is limited to almost 1/4 from the third month.

“In other words, the measure is effective, but temporary, as it loses its effectiveness over time. This may lead to the phenomenon of prices returning to their initial trend,” the report concludes.