Khachapuri Index as a Mesure of "Economic Security"

Khachapuri Index as a Mesure of "Economic Security"

The FINANCIAL -- All khachapuri ingredients, except eggs, have significantly increased in price in September 2014 relative to the same month of last year: cheese added 19.7%, flour - 17.2%, butter - 12%, yeast - 12%, and milk - 7.5%.  While Imeruli cheese is a unique Georgian product, all other khachapuri ingredients can be imported or produced domestically. According to GeoStat, in 2013, Georgia reached very high levels of self-sufficiency in such products as milk and eggs (around 90%). For wheat, however, Georgia heavily depends on imports, with only 10% of it grown by local farmers.

 

Wheat is a critical input for human and animal consumption, and a lack of domestic production makes Georgia extremely vulnerable to global price fluctuations. The 17.2% y/y increase in the price of flour suggests that Georgia is currently ‘importing’ inflation from the global market. Of course, like any country, Georgia keeps large stocks of wheat and other key commodities, providing a temporary cushion in case of global supply shocks. These stocks cannot last for too long, however. The vast economics literature on price transmission – i.e. adjustment of domestic prices in response to price changes in the global commodity markets – suggests that, on average, prices fully adjust (particularly) upward within 2-3 months.

Wheat prices are carefully watched by governments around the world, just like 2000 years ago in Rome. Then and today, cheap bread and circus (or football and rugby) are key for a country’s economic security and political stability.