The bread index: a robust measure of inflation in Georgia

The International School of Economics at Tbilisi State University tracks inflation and the cost of living across Georgia’s major cities using the bread index. To be more precise, or more Georgian, it used the Khachapuri Index. Khachapuri is traditional Georgian bread – and to track inflation, ISET uses a simple and robust formula. It includes the prices of only those ingredients that are needed to cook one Imeretian khachapuri – cheese, butter, flour, yeast, eggs, and milk – plus the cost of energy inputs – gas and electricity. Monthly costs track the fluctuations in prices in the major cities of Tbilisi (the capital), Kutaisi, Batumi, and Telavi. With bread being a staple food, the price can be compared each year.

From May 2010 to May 2011 the inflation in food prices (the Khachapuri Index) increased by 19.7% (from -3.1% to 14.3%). During the same period, the Consumer Price Index (CPI) increased by 14.3%. CPI measures changes in the price level of consumer goods and services purchased by households.

The reason for the difference is that Georgia imports much of what it consumes, including agricultural goods. Georgia only produces 5%-10% of its total wheat consumption and imports 600-700 tons of flour and wheat each year. Over the past year, the price of wheat has increased by 43%. This has resulted in the Khachapuri Index rising much more than the CPI Index. Bread prices have increased significantly, thus placing a burden on families, especially those in the lower income bracket.

In the light of Russia’s devastating wildfires in July 2010 and the loss of wheat production, Russia placed a temporary halt on exports, which was lifted only last month in May 2011. The halt on exports greatly affected Georgia. Georgia has to re-think its wheat production strategies. Almost 60% of Georgia’s wheat is imported from Russia, with the remaining 35% from Ukraine and Kazakhstan. The Government of Georgia plans to increase wheat production from 5%-10% to 30%-35% by 2012. Now the situation is becoming more urgent as the cost of bread continues to rise.

President Mikheil Saakashvili has called for an end to wheat dependency on a single supplier and a single source, and an end to the reflection of bread prices on price fluctuations internationally.

(http://www.iset.ge/)

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