In light of the latest inflation readings and forecasts for the price dynamics of basic food items currently subject to a temporary 0% VAT rate, the Finance Ministry has decided not to extend the reduced VAT rate on basic food products beyond March 31, 2024. This decision comes after a period of significant inflationary pressures, during which the government had introduced a temporary measure to alleviate the rising cost of living by lowering the VAT rate on essential food items from February 1, 2022. The reduction was initially implemented following a January 2022 inflation reading of 9.2% year-over-year (y/y).
Preliminary data from the National Statistics Office (GUS) indicate that inflation in January of the current year has fallen to 3.9% y/y, marking the lowest rate of consumer price growth since March 2021. Additionally, the annual rate of price increases for food and non-alcoholic beverages has significantly decreased to 4.9% in January, the lowest since September 2021. It is projected that both inflation and the rate of food price increases will continue to follow a downward trend in February and March. Factors contributing to the lower price dynamics include declining trends in global agricultural market prices and a strong base effect from the high food price increases observed in the previous year.
The GUS is scheduled to publish data on overall inflation and the dynamics of food and non-alcoholic beverage prices for January and February (taking into account new weights) on March 15. This upcoming report is highly anticipated, as it will provide further insights into the economic conditions that have influenced the Finance Ministry’s decision to revert to standard VAT rates on essential food items.
This policy change marks the end of a critical government intervention aimed at mitigating the impact of high inflation on the most essential segment of consumer goods. While the temporary VAT reduction was a relief for many during times of economic uncertainty, the latest data suggests a stabilizing economy, allowing for a cautious return to pre-pandemic tax rates on basic foodstuffs.
