Electricity costs fuel Bulgarian inflation

Bulgaria's consumer prices jumped 1.5% in June, raising annual inflation to 3.1% after a double-digit increase of electricity costs in the European Union's poorest country.

Analysts expect inflation in a country struggling to steer economic growth to rise to around 3.5% by the end of the year, because of a 13% hike in power prices as of July 1 and rising global fuel costs.

The centre-right government has a much lower forecast for the end of the year of 2.8%.

Bulgaria runs a pegged currency system which means its main tool for steering the economy is fiscal policy rather than interest rates, but inflation could turn into a headache for a government struggling to get consumers spending again.

"The main pro-inflationary factor is undoubtedly the rise of the electricity price. We did not have such a rapid rise in recent years," said Desislava Nikolova, chief economist at Institute for Market Economics.

Under the EU-harmonised inflation index, consumer prices increased 1.1% on the month in July and 2.4% from a year ago.

Services, where the costs of electricity are included, jumped 4.6% on the month and 6.0% on the year.

Food prices increased by 0.6% on the month in July, due to a rise in the cost of flour and bread. Non-food prices rose 0.2% in July.

The government expects the Balkan country to expand by up to 1.4% this year compared to 1.7% in 2011, but the European Commission and International Monetary Fund are much more downbeat – putting growth at 0.5% and 0.8%, respectively.