The year-on-year consumer price index (CPI) grew by 1.4% in the second quarter of 2014, down from 2.1% in January-March this year.
As in much of the region, the CPI has been held down by low food prices, which rose by just 1.5% year on year in the second quarter, down from 2.4% in the first.
Declines in administratively controlled prices have also held down the cost of services, which rose by just 0.3% year on year over the quarter.
According to the Central Bank of Azerbaijan (CBA), communications tariffs fell by 8.1% year on year in the first quarter, while transportation and postal tariffs fell by 5.1%.
Consumer prices have also been held down by a significant appreciation in the non-oil nominal effective exchange rate (NEER), which was up by 9.4% year on year in May owing to the falls in the Turkish lari and Russian rouble. Together these countries accounted for just under one-third of Azerbaijan's imports in 2013.
Economic Intelligence Unit (EIU) expects inflation to remain low in the remainder of 2014. The CBA will retain a hard peg against the US dollar, which has appreciated against emerging market currencies owing to the tapering of assets by the Federal Reserve (the US central bank) and perceptions of increased geopolitical risk. This means that the non-oil NEER is likely to remain high in year-on-year terms, holding down the cost of imported consumer goods.
Falling prices should give a boost to real incomes and help to sustain household consumption in the second half of the year. Real earnings grew by an average of 5.2% year on year in the second quarter, up from 4.4% in January-March and 4.7% in 2013.
Headline growth has slowed owing to declining oil production. However, domestic demand appears relatively robust. According to the CBA, nominal final consumption expenditure grew by 18.3% in the first quarter, up from 14% in January-March 2013.
Despite the challenging external environment, consumer confidence has risen, according to the CBA; its confidence index, based on surveys of household consumption intentions, stood at 26.4 in March 2014, compared with 25.9 in September last year.
(Economic Intelligence Unit)
Bakudaily.az
