Relative Prices and Inflation in Poland, 1989-97: The Special Role of Administered Price Increases

Abstract

The author evaluates how much relative price shifts affected inflation in Poland between 1989 and 1997. He uses a theoretical model that predicts a positive relationship between variance and skewness in the distribution of relative price changes and the general inflation rate. Regressions controlling for various shocks revealed that significant relative price changes -- especially the large administered price increases associated with adjustment -- produced substantial upward inflationary pressures. Growth in money and wages were shown to fuel inflation. Appreciation of the real exchange rate lowered it. Administered price increases -- in utilities and other sectors controlled by the government -- dominated inflation from 1989-97. And the adjustment of many controlled prices is not yet complete. Ideally, future administered increases should be frequent and moderate to prevent the large price shifts that increase inflation. But because frequent price increases are likely to be politically unpopular, sizable increases may be in order so that the current underevaluation of numerous services will diminish more quickly.