The annual headline inflation in Georgia eased to 4.3% y/y in June from 4.7% in the month before, the statistics office Geostat announced. Georgia’s central bank targets 3% annual inflation and has maintained a hawkish 6.5% refinancing rate, after having cut it to 6.75% in January and 6.5% in March.

Although preliminary data indicates increased economic growth in Georgia, demand side pressure on inflation remains weak, the central bank said when explaining its June 12 decision to maintain the rate. The growth of credit activity remained moderate, it added. Since early 2019, consumer loans and mortgages in foreign currency have declined.

The prices of food and non-alcoholic beverages, mostly responsible for the rise of the consumer prices recently, dropped by 3.9% in June compared to April, but remain 6.5% up y/y and they contributed 1.94pp to the overall 4.7% annual inflation.

The tobacco excises, having increased in January, are another relevant driver for the consumer prices in Georgia. Not only has the ad valorem exise increased from 10% to 30% as of January, but all tobacco products are now charged the excise previously charged on filtered cigarettes (non-filtered cigarettes were charged lower excise in the past). The price of domestically produced non-filtered cigarettes doubled on the year while the price of filtered cigarettes (local or foreign) surged by nearly 30%. The tobacco excise charged in Georgia is €0.56 per 20-cigarette pack, versus the €1.8 target set for 2024 under Tbilisi’s agreements with the European Union.

Consequently, the price of alcoholic beverages and tobacco increased by 20.1% y/y as of June (+0.2% versus April) and contributed a significant 1.33pp to the overall 4.3% y/y headline inflation in the month.

The core annual inflation in Georgia has remained around 3.4%-3.6% (3.6% y/y in June) over the past four months. But after extracting the contribution of the tobacco prices (pushed up by excises), the corrected core inflation remained around 1.1%-1.4% over the past four months.