Nov 2010 Financial News

Inflation: A rollercoaster ride…

Nov 11, 2010

T&T’s rate of inflation over the last three decades has dipped and soared like a rollercoaster ride. Like the energy prices that the T&T economy has been based on for more than 30 years, the inflation rate has been just as volatile. In 1974, at the beginning of the first oil boom, the rate of inflation was as high as 22 per cent. In 1991, when the economy was at the depth of its depression, the rate went as low as 3.3 per cent. Of course, the sharp rise in crude oil prices and a non-energy fiscal deficit were responsible for the high inflation during the 1970s.

Over the last few years, the rate of inflation has trended upward. Last Thursday, Central Bank Governor Ewart Williams, quoting from the Monetary Policy Report for October 2010, lamented that the rate of inflation is once again a worrisome phenomenon. One of the main factors Williams blamed the inflation rate on was the high price of food. He pointed to the rate of inflation, which reached a high of 16.2 per cent in August 2010, but declined to 13.2 per cent in September. “The main culprit in this has been the rise in food prices, which had reached on a 12-month basis as high is 39 per cent in August and has declined to 29 per cent in September.

“An area of concern with the inflation figure is that the bulk of the rise in inflation has come from domestic sources, the increase in prices of domestic products. You would have seen all around the world that prices of imported staples have been increasing sharply: wheat, rice, edible oils and so on. “Our inflation data is up. I am not yet showing the impact of this and that’s a cause for concern because if we are at 13.2 per cent now and the prices of imports have not yet passed through, I am concerned about what can happen a few months down the road, although core inflation has remained more or less steady at around at around four per cent,” he said.

Williams also tried to explain the high rate of inflation saying it is the private sector that normally drives the economy by producing goods and services and Government activity adds to that. However, during this period, Government is driving the economy. “What is happening now is that private sector spending is very low and Government spending is filling that gap that is being left by private sector expenditure,” he said. He added that leaving food inflation out of the equation, the Central Bank would have expected core inflation to be declining.

“This is because domestic demand being very slack, with there being specific spare capacity, we would have hoped core inflation would have fallen, but it has not. It remains constant at four per cent,” he said. He explains this by saying the structure of the market in T&T allows for this fairly rigid regime. “Our explanation is that clearly that may have to do with the downward rigidity in prices. The market structure is such that entrepreneurs are quick to raise prices up, but they can get away with not reducing prices as readily because of limited competition in the system,” he said.

Speaking about the structure of the basket of goods, Williams said there is an unusually large share of administered prices, prices that do not fluctuate by supply and demand. “For example, in the area of electricity, what happens in United States and most countries when electricity rates move, it moves through the entire wage structure or in gasoline, too. Here, gasoline remains fixed until there is an administrative decision. These prices are sort of controlled. The more of this, the more sticky inflation tends to be,” he said.

Historical inflation trend
According to the Central Bank data on inflation, during the last three decades, T&T has had mixed experiences with inflation. Over the period, inflation has tended to follow a pro-cyclical path, rising in times of economic boom and falling during recessionary period. During the period of the 1970s, the sharp rise in crude oil prices resulted in a significant increase in government expenditure, which boosted growth and stimulated aggregate demand. With non-energy fiscal deficit increasing sharply, inflation was at double-digit levels throughout this period.

As the Table One indicate during the decade of 1973-1982, the rate of inflation averaged 14.4 per cent and reached as high as 22 per cent in 1974. The Central Bank data indicated that for the following decade and against the backdrop of a significant fall in government revenues resulting from the crash in crude oil prices, the economy slipped into a recession that lasted for about ten years, from 1983 to 1992. During this recessionary period, inflation eased as the Government implemented a number of fiscal adjustment measures, which succeeded in significantly reducing private demand and the non-energy fiscal deficit. In the following decade of 1994 to 2004, the experience was one of significantly lower inflation.

The Central Bank attributed this to “the pursuit of more disciplined demand management policies and the process of trade liberalisation which has facilitated an increase in imports.” During the period of 1994 to 2000, annual inflation averaged 4.8 per cent, while from between 2003 to 2004 it declined to 3.7 per cent. After this it started to move up again, with a 6.9 inflation rate in 2005. From the period 2006 to 2009, the annual inflation rate was 8.3 per cent, 7.8 per cent, 12.05 per cent and 7.24 per cent, respectively, which reflected an upward trend compared to the earlier part of the decade.


Source:
Raphael John-Lall
Trinidad Guardian
Thursday November 11, 2010

http://guardian.co.tt/business/business-guardian/2010/11/11/inflation-rollercoaster-ride