While gradually increasing since June, in line with its seasonal trend (driven by a gradual decline in the production of fresh milk), the Khachapuri Index remains almost 10% below its level exactly one year ago. Constructed as a weighted average of the prices of various khachapuri ingredients, the Index is particularly sensitive to changes in the price of Imeretian cheese, its most expensive ingredient. The recent spell of annual deflation in the Khachapuri Index is thus a reflection of a peculiar sagging in the price of cheese (see table). For example, in August 2016, one kilogram of Imeretian cheese fetched only 6.4GEL, 18% less than in August of last year (7.8GEL).

Considering that in August 2016 Georgia saw an all-time record number of (hungry) tourists and visitors, the low cheese prices can only be explained by supply side factors, such as higher supply of raw materials (milk) and expansion in Georgian cheese production capacities (new factories).

Better weather conditions (lower temperatures and greater precipitation) in July and August may be one factor behind a slower-than-last-year decline in milk production. Yet another factor to consider is the sharp increase in the import of milk powder since December 2015. It is safe to assume that at least some of this milk powder is being combined with (cheap) vegetable fats to produce milk and dairy products such as cheese, increasing supply and reducing prices. This may sounds like technological progress, except that it is achieved behind the back, and the expense of, Georgian consumers.