Greece Inflation

Topics: Inflation, Unemployment, Monetary policy Pages: 2 (462 words) Published: May 8, 2012
In Greece the inflation growth rate remained fairly steady until the recession during 2008 in which the growth rate experienced a dramatic decline from 4.15% growth in 2008 to 1.21% growth in 2009. After 2009 it experienced a positive recovery in which the growth rate rose to 4.71% in 2010 only to fall again to 3.33% in 2009. Core inflation was not as volatile when the recession hit in 2008-09, however core inflation did experience a similar decline from 2010 to 2011 falling from 3.34% to 1.24% growth. Leading up to the recession unemployment was below NAIRU and GDP was operating at an efficient level above its potential, with a positive output gap, and unit labor costs were rising as well. These factors can normally lead to overheating of an economy, which often times is foreshadowing of a recession, and somewhere around 2008-2009 Greece went into a severe recession. Overheating occurs when inputs to production are harder to come by and naturally become more expensive. When unemployment is low and GDP is growing at a steady rate and is above potential, firms will have to pay more to attract new workers because there are not as many available. Unit labor costs experience upward pressure, resulting in the prices of goods being produced to rise as well, causing a rise in inflation. The economy and inflation grew to the point in 2008 where it could not be sustained any further and thus it collapsed sometime around 2008-2009. However, the bond yields began to sharply rise beginning in quarter one of 2010, which likely contributed to slowed economic activity. In Greece, all the signs point to a weak economy stricken with slowing growth of inflation as unemployment is above NAIRU, unit labor costs have declined the last four quarters, and the output gap continues to decline into the negative numbers. The output gap’s deep fall into the negative numbers shows that Greece is operating way below its potential. Greece is suffering through a recession, and the normal...
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