The Bank of Guyana (BoG) offers a useful explanation of “inflation”, which we should appreciate since it appears that this will remain the gravest challenge facing both the Government and the populace for an extended period. We are told that “Inflation is the sustained increase in the general price level of goods and services in an economy over a period of time. The rate of inflation is traditionally measured by the percentage change in a selected basket of consumer goods and services.” While an IMF report claims our inflation rate is around 1.7 per cent, other more realistic estimates claim it has been hovering around the five per cent rate. Meaning that every quarter, prices have been rising five per cent over the previous quarter. We should appreciate that the effect is compounded and by the end of the year, we may have suffered double-digit inflation.
The BoG informs us that there are two “types” of inflation – “Demand-Pull Inflation” and “Cost-Push Inflation’. The first has been pithily described as “too much money chasing too few goods”. This occurs when countries increase the amount of money circulating in their economies, to deal with shocks in the economy, without any commensurate increase of production in the desired goods – such as foodstuffs. In the present situation, the COVID-19 pandemic precipitated a precipitous drop in production across the globe accompanied by an increase in unemployment and income.
From 2020 the Governments of the advanced economies – with the US in the lead – pumped an extraordinary amount of money into their economies in line with the classic Keynesian interventionary doctrine to stimulate demand. By the time vaccines became available, G7 economies alone had poured US$9 TRILLION (“Quantitative Easing”) into their economies towards that goal. In a globalised world this easy money policy inevitably seeped into all economies as witnessed by lower rates of interest by central and commercial banks.
In the meantime, the second type of inflation – cost push – also kicked in as supply chain shortages became endemic and suppliers raised their prices to compensate for their increased costs. The war in Ukraine affected the supply of wheat and fertilisers. Even with some goods like locally produced vegetables, costs increased because of increased prices of inputs like fertilisers and pesticides, etc. As usual, it is the consumers who were hit by this double whammy as they scrambled, unsuccessfully, to keep their heads above water. It is of little comfort to be told that inflation is a global phenomenon.
Referring to the “consequences of inflation”, the BoG advises that “Inflation decreases the real value of money and income. This prompts those affected to want to protect their future investments and returns. Consequently, it is of primary importance to implement economic policy to ensure price stability. As such, the primary purpose of the Bank of Guyana is to formulate and implement monetary policy so as to achieve and maintain price stability.”
It would appear that the US has taken this standard advice after it had increased its balance sheet (debt) to US$9 trillion when it reversed its Quantitative Easing to Quantitative Tightening (QT) by raising interest rates after the first quarter, in a frantic effort to lower inflation which had reached its highest level in 40 years. The rest of the world in which most trade is still denominated in US dollars is reeling from this policy since it will adversely affect global trade that still hasn’t recovered. Small, open economies like ours will be hardest hit as we will again be paying for the excesses of the developed world.
The Bank of Guyana declares “it is of primary importance to implement economic policy to ensure price stability (control inflation). As such, the primary purpose of the Bank of Guyana is to formulate and implement monetary policy so as to achieve and maintain price stability”. However, the bottom line is that while economic outcomes are determined by policy choices and expectations, we have a very limited repertoire to counter the powerful global forces. Unfortunately, inflation will persist for a while. As the aphorism advises, “the strong do what they can while the weak suffer what they must.”