Why is there still inflation in Greece? (model this)

The rates of price inflation in Greece have been running in the range of 0.8% to 2%.

For another point of view, try this article:

The new bank that emerged from the breakup of Greece’s troubled Hellenic Postbank will initially hire all of the old lender’s staff but offer voluntary redundancies as it tries to cut payroll costs by 30 percent, its management said on Saturday.

The latter story of course is not just specific to a single firm but is common from Greece over the last few years.

It’s funny how many people pretend to understand what is going on here.  If Greece were seeing a stronger bout of price deflation, the situation would be much clearer.  How can you try to explain these disparate facts?

1. The true rate of inflation is much lower — in fact there is deflation — because of reporting biases in the Greek CPI.  That’s putting a lot of faith in numbers we do not see, plus it does not explain why the recorded numbers still show some upward pressure.

2. For structural adjustment reasons Greece needs a big cut in real wages, but AD is holding up OK.  It’s hard for me to believe the last part of that one.

3. You can have a major and sustained whack to AD, but still have rising prices.  How so?  Would Lieutenant Colombo be happy with this?

4. Scott Sumner has a view which I do not understand, and thus do not wish to try to state, but it has something to do with not really believing in the concept of price inflation.

5. Prices are sticky, AD is falling, and almost all of the adjustment is in quantities.  Yet this still doesn’t explain why prices are inching up, and furthermore it is grossly at variance with the actual empirical literature on price stickiness (much neglected in the blogosphere I should add), which is not nearly as strong as wage stickiness.

6. There are multiple equilibria, and Greece is moving from a perception of having “nearly West European levels of trust and cooperation” to having “Balkan levels of trust and cooperation,” and that is causing real wages and investment to plummet.  I’ve toyed with this hypothesis in the past, but I would be the first to admit it is highly speculative.  I do still think it is part of the explanation.

There is a similar puzzle for some of the other eurozone economies, and even, to a much smaller degree, for the United States over the last few years.


If there is inflation, people still seem to have too much money.

Is there any data on inflation expectations in Greece? Maybe there too, they have proven to be well anchored, not just indirectly in inflation measures but directly in household survey measures. Expectations don't seem to get their due in the blogosphere either.

As an economist when someone says, "0.8% to 2% inflation" what are typical margins of error?

Rahul, there's a lot we don't know about survey expectations of inflation (not for lack of study) ... what household actually mean (total, core, level, change, national avg, their basket of goods?) and how they form / change those expectations. Sure the error bands are wider than the CPI, but they are useful in forecasting actual inflation. And how do I use survey-based expectations, in general? I look at how they change over time and don't get too hung up on the exact responses. In the US recession, we saw measures of income growth expectations fall off sharply while expectations of price inflation were considerably more stable. Not saying this suggests to an easy answer but I would curious what these series did in Greece.

Typically economists only have 1 or less significant figures (if they are lucky).

How many significant figures you got? Economics is not statistics. The real world is a messy, constantly changing object that requires many different types of assessment. Honestly if you told me in one country (core) inflation was 2% and 0% in another and -2% in another I probably have enough information to roughly characterize their inflation situation. Believe me tango-ing with the third decimal place is not much fun and adds little.

Supply shock.

#6 is my version of this...

That is a probable explanation, but the truth is that there are major reforms in the labor market (the only market the governement actually tried to do something)
So even though we could have a productivity shock or more likely an adjustment-to-reality-shock, wages should at some point match the productivity level and
observe a rise in employment. This is not happening and we have to seek for an alternative explanation.

On the other hand it's always the factor of confidence...

Greece's chief exports are tourism and shipping. These suffer in regional economic problems.

*industries, not exports, technically speaking, although both behave like exports for obvious reasons.

Lol@ Alex Tabarrok. http://economistsview.typepad.com/timduy/

One should not exclude the lack of competition between firms in general but I believe the answer is taxation. Profits are falling due to lower demand but firms cannot adjust their prices due to higher taxes .The effect does not fade away due to the perpetual adjustment of revenues enforced by the Troika. In other words it is not an on-time rise in taxation, which could justify some statistical inflation for one or two years.

This is an indirect effect of not solving the debt problem, since the nominal revenues that the government has to raise does not leave enough space for price adjustment. One example are the special, temporary (?) taxes on housing, which is set according to the nominal, before-crisis value of the houses. So prices fall, but not so much as to offset other rising prices for tradable goods, hence a very low, but positive inflation.

Given the fixed currency and the relative size of the economies, shouldn't this be considered more similar to a failing US city like Detroit? Higher taxes, sticky payrolls, and increased risks (security, government, etc) push up the cost of production. Since external competition would be holding down prices for most product categories, local businesses would fail or migrate.

How much control does a nation have on inflation when not controlling its currency?

A nations debt has a very high substitutability for its currency.

GDP deflator has been negative three quarters in a row, Q4 2012 should be negative too.

The HICP measure you are referring to has the effect of indirect tax hikes. If you use the constant tax price inflation rate by EUROSTAT...you will see the picture is very different. That said, you are broadly right. I think the answer has to do with the fact that wage cuts in private sector started accelerating only the last 5-6 months (post the labour reforms in H1 2012) and the usual answers about the inefficient workings of product markets in Greece (e.g. closed professions, oligopolies etc). Troika had barely pushed any product market reforms before the second bailout package (march 2012)

Good point. I'd like to see product market and labor market prices separately.

Wouldn't Greece be the tail wagged by the dog here? They are using a currency that they have no control over, and that currency is being inflated. Add to that how much of Greece's needs are handle by imports from countries that are attempting to inflate their way out of troubled waters.

This sort of arrangement be similar to a economically depressed US state. Let's say you had 4% inflation for all of the US, an economically depressed Mississippi would still see inflation.

I'm not sure where you are going with idea #6, but there are signs that Greek social order is falling apart.


Regarding #3: It's Columbo (with a u).

For methodological reasons, owner-occupied housing (OOH) is excluded from calculations of the HICP in Europe. Greece has one of the highest rates of households owning their own dwellings in Europe. So if housing prices are tanking (or surging), this will not show up in a big way in the inflation numbers.

My guess is that if OOH were not excluded from the Greek HICP, the numbers would tell a different story, possibly registering deflation.

Page 67 of Eurostat's technical manual on owner-occupied housing has a good explanation:

I wrote a bit more about this here:

The omission of OOH means that inflationary pressures were not recorded during the boom years and that there is now unregistered deflation. I think this might be part of the story.

As far as I can see, empirically sticky inflation in the presence of evident demand deficiency presents a fundamental problem for New Keynesian modelling. It signals that the Divine Coincidence is no longer an appropriate baseline modelling case, and so inflation targeting is generally highly suboptimal as a a way of maintaining stable prices and a low output gap shortfall at the same time. Then inflation stabilisation is no longer justified by, say, Goodfriend and King's New Neoclassical Synthesis. This explains why basically all of the blogging macroeconomists who see demand deficiency as the main problem advocate the switch to NGDP targeting. Doesn't quite answer the question, but suggests that sticky inflation needs to be built into models regardless of its microfoundation.

Perhaps they have had inflation because they have begun to collect VAT and other taxes which they did not collect before?

I agree that the reason in this case is likely increased taxation. Economists seem to undervalue the role of taxes in driving price increases.

If most people in a country are becoming poorer, this can be expressed in higher cost of living as well as (or instead of) decreased wages/ increased unemployment.

The underground economy was much bigger then reported. The underground economy has little pricing power and is seeing a lowering of wages and prices. The CPI in Greece over measures the above ground economy which has more rigid prices and wages.

Greece underground economy



So a quite tiny eurozone economy has inflation similar to another, much larger, eurozone economy -

'Aktuelle Inflation Dezember 2,1%, November 2012 = 1,9%

Jahresinflation 2012 = 2,0%'


I wonder what the different inflation rates are between California, Maryland, Michigan, and Maine? Anybody have any ideas, maybe with a numbered list?

Well, this is interesting, using the same web site as the first link, Greek inflation in Dec. 2012 was -0.262 %.

And non-eurozone Denmark was -0.309 %.

Most other eurozone economies were percolating around at roughly the same rate.


I'm getting the feeling that one can pick and choose statistics to suit whatever narrative one wants.

For example, Greece is suffering inflation. Or deflation. Is in sync with the eurozone. Is out of sync with the eurozone.

Or for real fun, the Greek numbers prove eurogeddon has arrived.

+1 for empiricism.

An even better chart of Greek "inflation???" is here: http://www.global-rates.com/economic-indicators/inflation/consumer-prices/hicp/greece.aspx

I'm starting to wonder whether inflation isn't just another word for nothing left to lose - er, I mean certain sticky market definitions that get maintained at the expense of many other potential market possibilities.

Crazy stupid answer I don't actually believe in: Counterfeiting!

(...It would be exceedingly odd for this no balance out with all the other forces at work to around 1% inflation, not more or less.)

Link to Scott Sumner's version?

Does anyone have a good version of, "People in desperate straits are just *that* reluctant to lower prices"? Are the commenters pointing to taxes talking sense, or is there a standard refutation of that?

The other possibilities:
1) There is no such thing as AD. (Sims's answer).
2) Increased grey sector.

There may be some deflation to be sure, but enough to drive the massive downward pressure on wages we are witnessing? And insofar as one invokes flexible black market prices and wages, that also suggests that any negative AD shock won't be that harmful. So there aren't these simple ways out of the box.

No man differs more from he does from himself at a different time.

Headline of the Post: "Why is there still inflation in Greece?"

Your comment above: "There may be some deflation for sure, but enought to drive the massive downward pressure on wages we are witnessing?"

I'm trying to hold both thoughts--that there is inflation and that there may be deflation--in my head and am getting a headache.

Maybe we should call it "deinflation"? Steven Colbert would approve.

The point is simply that finding *some* deflation (which may be possible) won't do the trick, you are being deliberately dense here.

So, what is inflation in the aggregate if you look at prior-approval's comment? You know, balancing the inflation/deflation to make the aggregate. It seems that one can't make a statement of what is "inflation" if there isn't an agreement unless you net out inflation and deflation to give one number. Isn't an economy always having things that go up and things that go down, and we look at the aggregate.

Or, am I just deliberately dense?

Maybe I am dense. Or, maybe the headline is misleading.

Is .325% inflation really inflation, or is it measurement error?

Here's the source: http://www.global-rates.com/economic-indicators/inflation/consumer-prices/hicp/greece.aspx

Did a little research, most surprising finding the -6% deflation (GDP deflator) in Ireland in 2009.

The comparison with Ireland is interesting. Ireland did experience quite some deflation, until recently, when we look at the broader and better GDP deflator (we should in fact look at total expenditure, INCLUDING imports). I'm pretty sure that Irish deflation was largely caused by lower prices for investments (read: new houses); Greece had much less of a housing bubble. And at this moment investment prices are even higher than in Ireland. http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-SF-12-049/EN/KS-SF-12-049-EN.PDF

Also, not unimportant, the price level in Ireland was (and is!) one of the highest of the EZ while the Greek level is slightly below average (117 against 95), going down from a high level might be easier than going down from a lower level (see, however, Denmark!). http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-SF-12-049/EN/KS-SF-12-049-EN.PDF

I'm however surprised, too, by the tenacity of prices, surely when you think that Greek wages did decline faster and more than anywhere else in the EZ - seems that quantities produced are more flexible than prices (Greek GDP is plumetting).

Considering the large current account deficit, many prices in Grece were not domestic, though this is of course changing. And sectoral changes in the periphery economies are extra ordinarily large, which can wreak havoc with statistics when lots of businesses that did report to the central statistical offices suddenly disappear (especially the ones with high prices?) which might mean that changes in prices are only recorded for companies that already had relatively low prices.

Tim Duy has the goods: http://economistsview.typepad.com/timduy/.

Ex-energy, which has seen tax hikes, Greece has 1% deflation. But I'd have to agree with Tyler that this seems like too little deflation given the output gap. The most obvious answer is that Greece has had repeated VAT increases, and tax increases on energy leak into other prices over time. But still, what if we could net out the VAT increases and find that Greece had 1.5% deflation. Still seems like too little deflation...

Is it bad data? Extremely sticky prices? Seems like these are testable hypotheses for some enterprising grad student...

In any case, this seems to be a puzzle everywhere. In the US, we didn't have as much disinflation as anyone would have expected. The Euroland GDP deflator is still up at 1.2%, though likely driven largely by VAT increases.

Actually, I posted that too quickly.

Greece went from having nearly 4% inflation in 2008 and in 2010 (clearly VAT related) to -1% in 2013.

That's a sizeable swing in inflation. The economy shrinks by 6% per year and since 2010 they've experience 5% disinflation. When the US economy was falling 9%, I believe disinflation was in the same ballpark...

Not enough information is given here. E.g. which sector of the Greece economy is experiencing the most inflation? Is it import goods? Is it tradables? Is it housing? Is it fuel and food?
More information is needed to explain a 2% inflation IMO.

One more thing. How reliable are the data? Do you expect them to change in future adjustments?

What percentage of wage earners are on government payroll our assistance? Prices at the wholesale level would not be going down, greece imports much. Costs of doing business are going up, increased taxation and other costs such as financing. Who knows what else. Are the supply chains effective our are there delays of all sorts due to a hesitation of exporters to greece, ineffective short term financing arrangements (we will ship when your check cashes).
I thought the no inflation without an increase in AD was discounted a generation ago.

Sentences to ponder:

"It’s funny how many people pretend to understand what is going on here."

You thinkin' what I'm thinkin'? On the count of three: 1, 2, 3: BUMPER STICKER!

The Greek inflation puzzle is just a more extreme example of a similar puzzle in many countries. Canada for example. Why has Canadian inflation stayed almost exactly at the 2% target (on average) when we have supposedly (and plausibly) had an output gape over the last 4 years?

I do not understand it.

Two desperate guesses:

1. Peso Problem Recessions (firms don't cut prices because there is a small probability of very big monetary loosening, which has not been observed yet in the data); http://worthwhile.typepad.com/worthwhile_canadian_initi/2013/01/are-there-peso-problem-recessions.html

2. Inflation targeting made inflation stickier. http://worthwhile.typepad.com/worthwhile_canadian_initi/2013/01/did-inflation-targeting-make-inflation-stickier.html

At the core I think the US and Greece have structural problems with their economies. An underground economy, that seeks to avoid the taxes and regulations imposed by the government, can not drive the type of growth and investment that the economy needs. Funds are diverted from things that could grow the economy into things that game the system. Potential GNP shrinks even as more people are able to find work because they are working in sectors that don't encourage real long term growth in the economy. Wages may be flexible, but they are going into fields that have low marginal productivity with little desire to make the investments to increase productivity - because of structural problems. People who might be employed in high productivity careers are instead employed, at lower wages, in low productivity careers. They could be employed in more productive activities but structural barriers prevent investment to create those jobs.

Consider a country where a government outlawed the creation of labor saving machines. People would be employed at low wages in low productivity activities. The workers could have the potential to be much more productive if people invested in better tools, but lacking innovations, real growth stops. Other countries that do not impose restrictions on innovations attract workers and investment. They grow. Now imagine country that allows labor saving machines but instead taxes and regulates the new machines.

With all due respect to Professor Sumner and his magic bullet of NGDP, I don't see that as sufficient to grow the economy if the government is increasing structural barriers to growth.

It may be time to introduce a new statistic which simply attempts to measure increases and decreases in the cost of living. This is what the man in the street thinks "inflation" is, but the government and economist definitions of the term have diverged from this for quite some time.

I live in Greece, posting from Athens at the moment, so that makes me an expert here. I don't think it's lack of trust as TC says, as there was very little trust here even in the heyday. I think it's just a statistical artifact and also sticky prices. For example: during the off-season a lot of hotels will not cut prices since the Greeks feel they'll make less money, as off-season tourist volume is a constant. Irrational perhaps but that's their mentality. Also the constant strikes here (several hundred a year--I kid you not--just this weekend the entire Athens metro is on strike) have an effect on profitability so perhaps that also prohibits firms from cutting prices as it won't do much good (if volume is constant--what's the term in econ? supply is inflexible). A builder I know reduced the price for a condo by about 20% from the 2006 boom price, but instead opted not to sell it at a lower price. Since he's not leveraged that's also a factor--why cut prices if you don't have to? Remember, the average Greek is OK, it's the government that is bankrupt.

"Since he’s not leveraged that’s also a factor–why cut prices if you don’t have to?" Well if you thought prices were going to fall even further and stay lower for a while, you'd be willing to cut now. The idea that this is limited to the government is amazing, but perceptions can matter a lot.

Cost-push inflation.

Because of lower sales, fixed costs are being spread over a smaller number of units being sold. I saw this same thing happen in Canada in the 1982 recession and was puzzled at that time as to why prices were rising in the middle of a brutal recession. Retailers had no choice but to raise prices on each item sold as there were fewer customers to help absorb the fixed costs.

Good point

Cost push presumes market power. Fixed or sunk costs get ignored when pricing; what is relevant are marginal costs. A firm that operates in a competitive industry would reduce margins. A firm in a non-competitive market would, in response to reduced quantity demanded, raise prices--but it would need to have market power to do so.

So, perhaps this says that there are segments of the Greek economy that enjoy market power or market protected status.

I think there is some degree of market power in most segments of most economies.

But alternatively (or in addition), it could be a variable price rather than fixed cost story: firms within some industries are moving downward on an economy-of-scale curve, so that per-unit variable costs are rising.

*"variable cost" not "variable price"

No., I'm sorry. Don't agree.

Think of it this way.

Assume two types of markets: one competitive, one not. In the competitive market, if there are sunk costs, they are sunk. You ignore them. What you care about is contribution margin--the difference between variable costs and price. If, before the recession, you didn't raise price to increase margin, because you would have lost sales and contribution margin, nothing changed AFTER there was a drop in total demand during the recession. So, you are not going to raise prices. You will just have a smaller contribution margin...you will absorb these costs, because if you raised price, and you were in a competitive industry, rivals would gain by not following...they would get the extra sales at the lower contribution margin...too bad for you. Now, that being said, if all your rivals received the same costs uniformly, like a tax increase, you might see cost push. But, as a competitive strategy for a firm in a competitive market...sorry.

Now, if you have market power, you might be able to raise prices. Some firms with market power do not use it during good times...it is difficult to coordinate prices with rivals, firms satisfice, set objectives as stable margins, etc., so when a recession arrives, they raise prices, or don't change them. It is also true, though, that firms with market power, during inflationary times, generally do not raise prices as fast either.

By the way, if all of your rivals have their variable costs increase, they will raise price (eg, oil price increase to refiners). But, that is not what we are seeing in Greece, is it.

Real wages are no longer procyclical. No one is willing to let labour take a larger share of the national income in a recession. Ergo, downward sticky wages+ commodity boom can probably explain the data.


Inflation can be consistent with deflationary pressure and sticky prices.

Imagine a situation where in a unsticky world there would be some deflation. However, prices do not move uniformly, so many goods would still see prices increases. Now add complete stickiness so that all price increases go through but no price cuts go through. In such a world, no matter how much pressure there is to deflate, there would always be a small positive inflation brought on by the positive tail.

I doubt this is the primary effect, but I wouldn't be surprised if it added 0.1% to inflation during recessions.

"2. For structural adjustment reasons Greece needs a big cut in real wages..."

And debt balances need to be slashed by how many times the "big cuts in real wages"??

Or do you argue the economy will thrive when individuals need to increase the portion of their wage income servicing debt rising from 100% to 500% of income?

I find it interesting to see the solution to workers not earning enough to service their debt being to earn even less so their debt service becomes an even greater drag on the economy - either their consumption contracts further driving down labor demand further, presumably in the hopes that wages become so low that the productive capital is scrapped to drive down productivity to increase demand for labor. Or the default rate on debt increases and either everyone with savings losses their savings, punishing virtue, or the government makes good on bad debt to make sure savers are not convinced that saving is for fools, and loading up on debt to fund pure consumption is the best way of life.

Isn't this just a temporary bump due to rising energy costs? FRED has a few charts ranging from "core" CPI to harmonized indices, and they show negative CPI, excluding energy and food, as of July 2012. Nondurable goods are negative.

I hope eventually Tyler realizes that Sims is right and that there is no such thing as AD.

The solution: Nominal GDP and the GDP deflator both tanked, then stabilized at deficient levels. The CPI is biased and doesn't reflect the relevant price level (option 1). Honestly, was it so hard to pull up the FRED graph?


And positive, indeed above trend NGDP growth is consistent with recession and unemployment, you just have to be below the trend level path (the path of nominal hourly wages).

Have to look for something like CPI excl. energy, food, alcohol, tobacco (e.i. core) at constant tax rates. In fact, most of the inflation in the Euro Area comes from energy, food and taxes. The best I can get from Eurostat is this : http://i49.tinypic.com/sw74he.png

Maybe everyone's feeling a bit more poor and trying to eke out a bit more profit on each sale?

I don't find this very surprising or model-breaking. Greece is a small, open economy whose monetary policy is set in Frankfurt. For all tradables, prices and therefore inflation rates will be determined by the European market as a whole. Just because there is high unemployment on your block, you don't expect that food and gas prices will fall for you and your neighbors. Greece is in the same situation.

Simple... The underground economy is growing as the reported economy shrinks.

I think I answered this question; will repost here:

Tyler Cowen poses this question:

Why is there still inflation in Greece?

He thinks this puzzle is hard, but it is in fact easy. Let’s model this more simply:

There are three countries in the world, Productoland, Moderatia, and Dysfunctiony. In this model there are a few rules:

· All money is gold.

· All goods and money can be teleported and traded freely across national borders.

· There is a universal legal prohibition from a resident of any country from relocating to any other country for non-leisure purposes.

· Wages are sticky.

· The equation of exchange accurately describes these economies.

In the initial state all three economies are performing well, even though “fundamentals” (mainly institutions) are much stronger in Productoland and significantly stronger in Moderatia. However, after some unexpected shock (say, a surprising report about the economic state of Dysfunctiony), there is a “panic” about the economy of Dysfunctiony. Very rapidly money, ie gold, begins to flee Dysfunctiony.

What would we expect to see happen? Primarily, we would expect to see a substantial negative shock to AD in Dysfunctiony. Wages are sticky; and more importantly, the law of one price means that prices of all goods (since there are zero transaction costs in this model) must remain equal in all three nations. Therefore, the decrease in MV would result in a reduction in QP; but because both Plabor and Pgoods are sticky, we would expect to see most of the commensurate decline occur in Q. We would expect to see some slowdown in Productoland and Moderatia, since presumably the market for imports in Dysfunctiony is slower, and overall global NGDP would probably fall, but if labor markets remained relatively tight in Productoland and Moderatia, we may in fact see the increase in MV in those countries (due to the influx of gold, ie money) lead to an increase in P, since Q is probably nearing its upper-bound; and an increase in P in those countries would of course result in a further increase in P in Dysfunctiony to the extent it affected teleportable goods. This would of course result in a further commensurate decline in Q, which would cause MV to further flee.

Basically, if transaction costs and barriers to trade are low, we should expect to see consumer prices move in unison within a currency union, and we should expect monetary shocks to result in severe real declines in output but continued price stability. This, I believe, sufficiently explains why Greece saw massive unemployment even as prices continued along the ECB’s chosen path, for the same reason Nevada saw unemployment increase from 4.2% to 14% over the course of the Great Recession even as there is no evidence that consumer prices diverged wildly in Nevada from other parts of the United States.


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