Understanding Inflation

Feb 02, 2022 Letters

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Dear Editor,
I write in reference to Joel Bhagwandin’s missive on the proposed new $2000 bill and inflation (Feb 1) to give greater clarity to the issue.
Inflation is the rate of increase in prices over a fixed period. There is a base period for the measurement of the increase – usually the preceding year or month. It is measured in percentage (and given monthly or quarterly or semi-annually or annually) — so as to determine by how much, prices decreased or increased over the compared period.
The way inflation is measured is, there is a basket of goods of fixed quantities, the prices of which are totaled, that a family needs for survival. In different countries, the basket is different but usually includes basic foods or staples, rent or mortgage, and utilities, transportation, energy, etc. The price of the basket of goods is compared with another period. If the price increases, it means inflation goes up, and the number is positive. If prices go down, inflation is down or a deflation, the number is negative. Rarely, is inflation negative though not impossible. Guyana never experienced negative inflation or deflation. If inflation is 6%, it means prices went up by that amount in relation to the compared period (say 2021 over 2020 if it was 6%).
In the US, where more Guyanese live than in Guyana, there are three measurements of inflation — Wholesale price index (or WPI), Consumer Price Index (or CPI), and Core Inflation (inflation that excludes energy and food). The public pays attention to the CPI – the measurement of which is standard as noted above in the price of the basket of goods that compares with the previous period. Guyana also uses the CPI and inflation is given annually as opposed to monthly.
As Joel penned, there are several causes of inflation – demand pull, cost push, wage spiral, among others.
The most common one is when there is too much money chasing too few goods or demand pull. In other words, there is goods scarcity but people are flush with cash and so pay increasingly higher market price. Guyana has experienced a ‘strange’ kind of inflation. People claimed they lacked money, wanted the goods, didn’t purchase them, but prices went up anyway. There was/is a shortage of basic farm goods over the last nine months as a result of the flood that wiped away crops resulting in price increase. Imports of staples (like flour, dhal, potatoes, milk), cooking oil, energy, etc. became costly because, as Joel pointed out, of shipping costs due to the pandemic and rise in price of petroleum – the cost push. Inflation was rising before the wage increase of 7% and the increase in the minimum wage to $70K. The $25K pandemic stimulus and or other grants did not have much impact on inflation.
The problem with measurement of inflation is the numbers tend to be fudged in third world countries as compared with developed countries. Most countries have a cost of living allowance of salary or social welfare benefits tied to inflation. The lower the official inflation, the less the government has to dole out in increases. The pressure is on to keep inflation low to reduce costs of government or business operations. Also, the IMF and World Bank usually required low inflation tied to dole out loans. Preparers of inflation tabulation tend to be pressured to fudge the numbers. It was impossible for annual inflation to be 2% between 2015 and 2020.
It is virtually impossible for inflation to be 6% for 2021 given that the UN says global inflation was 7% and the US also reported inflation at 7%. Visitors to Guyana say cost of living in USA is substantially lower than in Guyana. (President Ali wisely introduced various subventions and reduced taxes to reduce cost of living. Such measures would lower inflation).
In the US, it is impossible to fudge inflation numbers. Labour and workers would be up in arms and the future of politicians would be in jeopardy. Even government officials would not want to get linked to attempts to fudge inflation numbers.
At any rate, inflation measurement is de-politicised in the US. An independent body monitors and measures inflation.
The Fed keeps an eye on inflation like a hawk and takes measures to control it. Inflation is a complex phenomenon and one has to apply the right dose of medicine to control it using fiscal or monetary policies. Each situation would require a different dose of each or both. An economist (usually a macro-economic specialist) would suggest the right dosage of medicine. It does not always work because economics is not an exact science like chemistry or biology or physics.
Injecting too much money into the economy (like printing money) causes inflation like when Bush Jr and Obama injected $8 Trillion into the economy in 2008 and 2009 and when Trump and Biden injected $5 trillion in 2020 and 2021.
That was paper money that was simply printed and circulated to the public and businesses – there was too much money in circulation triggering inflation but it was kept under control.
With regard to the injection of the $2000 note in Guyana’s economy, that money is not given to the public for consumption.
The people will exchange their own smaller denominations for the larger bill.
It won’t encourage them to spend more.
Thus, it is inflation neutral.
Yours truly,
Vishnu Bisram

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