Introduction
My previous column focused on two technical terms, rarely mentioned thus far in this column series on Guyana as a Petrostate; namely, the real effective exchange rate, REER, and the exchange rate regime, ERR.
Today I address a third technical term, inflation. While I have dealt with this term in the series before, my fear is a number of readers might still conflate inflation with high prices, despite my urgings that, what matters is the rate at which prices are increasing. To repeat therefore, inflation refers to ongoing increases in the general price level for goods and services in an economy over time.
Methodology
My previous column noted that the REER methodology establishes the value of a nation’s currency against a weighted average of its major trading partners currencies divided by a price deflator or index of costs.
Consequently, an increase in REER implies that exports become more expensive and imports become cheaper; consequently, an increase indicates a loss in trade competitiveness.
Of note REER data can be accessed through the International Financial Statistics (IFS) dataset portal [Source IMF]
Price Deflator
The gross domestic product (GDP) price deflator is a formula that measures the amount to which the real value of an economy’s total output is reduced by inflation.
The GDP deflator formula considers the value of all final goods including exports. It does not factor in the prices of imports.
Measuring inflation
Good practice recommends:
1] Collect prices of a large number of goods and services and for households a “basket” of these that mirrors actual consumption.
2] Use the basket to construct a price index.
3] Determine current value/cost of the basket for a base period
4]. Calculate price index, the ratio of the value of the basket at today’s prices to the value at the base period prices.
Alternatively, a more convenient method is to construct a price index that is based on relative weights to the prices of items in a basket. of goods and services., The relative weights are assigned from surveys of consumer’ and business expenditure patterns.
The two primary measures of consumer prices—the consumer price index (CPI) and the personal consumption formulation construct a price index that assigns relative weights to the prices of items in the basket. In the case of a price index for consumers, statistical agencies derive the relative weights from consumers’ expenditure patterns using information from consumer surveys and business surveys.
More details on constructing a price index can be pursued by interested readers as well as the two primary measures of consumer prices—the consumer price index (CPI) and the personal consumption expenditures (PCE) price index..
Inflation defined
Prices are changing all the time, but we cannot claim there is inflation every time we observe a price increase. Instead, we say there is inflation when the prices of many of the things we buy rise at the same time and then continue to rise. Explained another way, inflation is ongoing increases in the general price level for goods and services in an economy over time.
Drivers of inflation
Historically, there are a large number of drivers, which have been held responsible for inflationary increases in prices, within and across national boundaries. These include national conflicts, socio-political disorder, environmental challenges as well as wage costs, energy, food; imports, distribution costs including transport, currency appreciation, excess D, and S shortages. Decompose the components of the basket of goods and services.
Vigorous debates on CPI
The recent writings on inflation in Guyana, -[CPI], have been, to say the least, replete with competing drivers/ generators of local inflationary processes. This literature seemingly seeks to assert, it is empirical and survey-based, thereby eschewing any role for pure conjecture, anecdote, or active imagination in its formulation. The controversies that have emerged are indeed quite fierce.
So fierce has been the controversies that a sample of the Bureau of Statistics declaration in a letter to the media illustrates, To quote:Top of Form
The Bureau of Statistics has taken note of a letter published in the February 18, 2024, edition of Stabroek News titled “Cost of living Index data is missing or unreliable”
The letter claims that the Consumer Price Index official data is “missing or unreliable”, which is wholly inaccurate. The Consumer Price Index (CPI) is prepared monthly, and it is the weighted average prices of a fixed basket of goods and services consumed by the average Guyanese household, from one period to another. The CPI is used to calculate inflation, which is the change in Standard used by agencies such as the United Nations Statistics Division (UNSD), International Monetary Fund (IMF), World Bank, Eurostat, and International Labour Organisation (ILO
Methodology used to compile the index
This approach starts with a Household Budget Survey (HBS) that collects detailed information on household expenditures that are used to compile the CPI basket of goods and services with those items that account for most household expenditures. The Bureau then uses this CPI Basket to collect prices on a meticulous and systematic basis in the CPI
In deriving the Consumer Price Index, the share of each good and service relative to the total household expenditure is used to “weight” the items in the basket. These weights help to ensure that price changes for individual items do not sway overall CPI more than their importance to the expenditures of the household.
On the other side, Gampat observes, that no study of inflation in Guyana has been done during the last two decades or so, due in large measure to poor data quality. He reminds us correctly that, garbage in means garbage out is the rule for all quantitative models of inflation regardless of how good the model is in theory.
To be professional one must accurately know 1] the latest update of the consumer basket of goods 2] the weights by category of goods. In Guyana both were fixed decades ago
Thus, the weight or relative importance of the “food price index” in determining domestic inflation must have been shaped by events like Guyana’s post oil rapid GDP growth, rising incomes and social media exposure to global consumption that has most likely changed thereby making some commodities in the basket no longer relevant. In effect, the basket is misleading as to prevailing spending
Conclusion
Next week I wrap-up this discussion before proceeding