by Kari Grenade, PhD Regional Economist and Macroeconomic Advisor
Inflation — a general increase in the prices of everyday items — is sweeping across the world. Globally, prices of food, fuel, lumber, steel, appliances, cars, clothing, you name it, have increased significantly in recent months.
There have been surges in commodity price indices that are monitored by the World Bank; for example, its Food Price Index rose from 86.86 and 88.46 in July 2019 and July 2020 respectively to 120.89 in July 2021. The Bank’s Energy Price Index moved from 74.85 in July 2019 to 51.20 in July 2020 to 97.66 in July 2021 and its Raw Material Index increased to 83.44 in July 2021, 10.7% and 8.2% higher than in July 2019 and July 2020 correspondingly.
High and rising global prices are as a result of a confluence of factors. They include: (i) growing global demand (by human beings) for goods and services as economies reopen following lockdowns; (ii) adverse weather conditions in various parts of the world (for example fires in the USA, droughts in Brazil, floods in Germany, and crop failures in China) have contributed to shortages in various commodities and in turn, increases in global food prices in particular; (iii) supply-chain problems such as tight inventories of material, shortages of labour and other inputs, logistical bottlenecks, congestion at various ports and delays along production lines; and (iv) massive stimulus spending in advanced economies to cushion the adverse effects of the Covid-19 pandemic.
There is an ongoing global debate among experts about how high prices can go and whether or not the current spike is temporary. In my view, high prices are likely to persist for the foreseeable future as global demand picks up and unless and until production lines become more resilient to shocks through for example shorter supply chains or outright re-shoring (relocating production back to home countries), which will not happen overnight. Food prices in particular are likely to remain elevated for the remainder of 2021 and certainly until stocks of grains are replenished and grain prices decline. Regarding fuel prices, they are anyone’s guess, but the USA-based Energy Information Administration in its Media Release of 10 August 2021, indicated that it expects prices of Brent crude oil to remain near current levels for the remainder of 2021, averaging $US 72/barrel from August through November and fall to an average of US$ 66/barrel in 2022.
The implications of high and rising global prices for Caribbean governments, firms, households and individuals are immense given the Region’s heavy dependency on imported goods. We know all too well that the majority of the products consumed in the Caribbean are not produced in the Caribbean, and as such, price hikes in economies from which imports are sourced are directly transmitted to regional economies.
Anyone who has gone grocery shopping in recent weeks, or filled up on gasoline, or paid her/his electricity bill, or purchased a vehicle or building material no doubt has felt the pain of spikes in prices. Importers and businesses have also experienced the shock and awe of freight charges, which have skyrocketed. The increases are hitting at a time when individuals and businesses are still struggling financially from the fallout of the Covid-19 pandemic. Overall, Caribbean countries are facing higher import bills while their national incomes remain below 2019 levels.
While moderate price increases from time to time are expected in growing economies to compensate entrepreneurs for the risks involved in doing business and rising costs of production, excessive increases in prices that are prolonged are not only economically problematic, but socially disruptive as well. Indeed, the current brutal price hikes can exacerbate social protests witnessed recently in some Caribbean countries. Furthermore, rising food prices in particular are disproportionately burdensome for the poor and food insecure who can least afford to bear more hardship. High food prices are not only economically burdensome (especially for the poor and vulnerable), but they can also potentially have serious health effects as people limit food consumption and/or switch to more unhealthy foods and unbalanced diets.
The solution to high prices cannot be high prices, especially in the context of the extant economic downturn. Measures must be taken on several fronts not only by governments, but also by firms and individuals to cushion the impact of imported inflation. Therefore, I offer some suggestions to help the Caribbean’s response.
For governments: While options are limited given the imported nature of inflation, policymakers should always focus on what can feasibly be done (even if marginal) as opposed to what cannot be done. Policy responses must be quick and effective. Quick because families and firms are hurting now and effective so that the ultimate objective of their interventions (i.e., lower prices for firms, households and individuals) is met while keeping associated fiscal costs manageable. Governments can consider targeted and temporary tariff and tax reductions on certain imported items such as healthy foods, inputs for agricultural production, and hurricane supplies (especially now in the hurricane season). Consideration can also be given to temporarily expanding the list of zero-rated basic items as well as temporarily increasing the number of items that are exempted from the VAT. Furthermore, selected and targeted price controls can be introduced on a temporary basis with strict supervision and punitive costs for noncompliance. Additionally, support to increase agricultural production, and by extension, healthy nutritious foods must be prioritised. Measures such as distributing lands for agricultural use, providing targeted fiscal incentives to lower the cost of inputs into agricultural production, and promoting organically-produced fresh foods would be important. Scaled-up and better targeted social safety net programmes for the poorest and most vulnerable that focus on nutrition security for elderly and children should also be prioritised.
For firms: Firms might want to consider collaborating in engaging suppliers, procuring from suppliers, and shipping. Firms can also consider introducing new lower-cost brands and products. Containing discretionary costs would also be important.
For households and individuals: Consumers can implement cost-cutting measures and make their dollars stretch by switching to cheaper brands, limiting the number of shopping trips, making a budget and sticking to it. They can also seek personal financial advice by reading finance blogs, watching YouTube videos on finance and speaking to an accountant for example. Back-yard gardening and community bartering (I give you yams, you give me tomatoes) will also help.
Caribbean countries are yet again having to deal with high and rising international prices. While temporary measures may provide some respite, more durable solutions are needed. Lessons evinced from previous food and fuel price shocks (the most recent being in 2008) are clear that the region needs to be more serious about large-scale investments to boost agricultural/food production and to accelerate the transition to renewable sources of energy.
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