The July 1 price hikes of almost all utility services in Bulgaria prompted a debate on Bulgaria's readiness to sustain the pressure of ever rising inflation.

The prices of electricity for households increased by an average 14.1 per cent, central heating prices went up by 12.9 per cent, and gas prices rose by 5.16 per cent. The price of train tickets went up by nine per cent, while the public transport ticket price in Sofia increased by a record 43 per cent, reaching one lev for a single journey.

The price of natural gas reached 222.31 euro a 1000 cu m, an increase of 5.16 per cent. To compensate, the Government increased pensions by 10 per cent, with employees in the state administration receiving a salary increase of 10 per cent as well.

A week before July 1, Bulgarian National Bank (BNB) governor Ivan Iskrov projected that inflation in Bulgaria might reach seven to eight per cent at the end of 2008. "The official forecast of the bank is for about 6.5 per cent at the end of the year, but we expect that the indexation of electricity, natural gas and heating prices will push inflation higher by one to 1.5 percentage points," he said, as quoted by Bulgarian-language daily Dnevnik.

Monthly inflation in Bulgaria was 0.9 per cent in May and 15 per cent year-on-year, the National Statistical Institute said. If structural reforms continued and the Government pledge to keep salaries in check was kept, inflation would not hit double-digits as it did in 2007.

Luchezar Bodganov of think-tank Industry Watch said that the main reason for the high year-on-year figure was the soaring inflation in autumn 2007.

Finance Minister Plamen Oresharski is even more optimistic when it comes to forecasts on inflation in the summer months. In an interview with Dnevnik on June 21, he said that in the absence of internal and external shocks, inflation in 2008 would remain restricted to a single digit. "Aside from the external factors that do not depend on us - petrol and food - the key factors are salaries and income levels," Oresharski said.

A week later, he said that the Government did not plan any special measures to fight inflation, focusing on fiscal policies. The Finance Ministry expected inflation to go down during the summer and by the end of 2008. BNB was doing the best it could by maintaining higher mandatory reserve requirements on banks to limit lending.

Open Society Institute Sofia senior economist Georgi Angelov said that electricity and natural gas price hikes would have a knock-on effect and increase other prices by about one per cent by end-July, while by the end of the summer, the higher utility prices would add two percentage points to total inflation.

"By the end of the year, inflation may reach between eight and nine per cent if crude oil prices remain at current levels," Angelov told The Sofia Echo. A further increase in global crude prices could push inflation in Bulgaria beyond 10 per cent, he said.

With fuels and foodstuffs' prices out of the Government's hands, what it can do to slow down inflation is increase competition in some sectors of the economy by cutting down the number of bureaucratic barriers for businesses and offer a better business environment for both local and foreign companies, Angelov said. Labour costs would benefit from smaller social contributions, which would also boost disposable income and have an impact on inflation in a way that cutting the value-added tax, suggested by opposition parties, would not.