Sanction and inflation

Do they go together like a horse and carriage?

Prices bumped up a bit in Kazakhstan last month, reports the government’s statistical agency.  Compared to September 2013, prices rose 7.4%.  This was significantly higher than the 6.4% average for January through September of this year relative to the same period of last year.  Although a one-month change in the inflation rate is too short to tell us much about the economy, it's intriguing to see that since last September, the prices of nonfood goods have risen 8.4%, which is outside the National Bank’s target corridor for inflation of 6% to 8%.

Why the bump?  Ever since the West levied sanctions against Russia because of Ukraine’s civil war, Russian food exports to Kazakhstan have increased, according to Panorama.  Thus Russia may export inflation to Kazakhstan as well.  But the inflation rate in Russia is close to that of Kazakhstan, so the sanctions may not affect Kazakhstani inflation considerably, reports the business weekly.  It is not clear whether this is Panorama’s own analysis or that of the National Bank of Kazakhstan.  In any case, it’s a leaky bucket.       

If anything, the sanctions should lower the price of Russian exports to here.  Since Russia can no longer sell as much as before to Western Europe and the United States, it will try to sell more to Kazakhstan.  That will require price cuts.  And food prices, for once, do not comprise the fastest-rising category of Kazakhstan’s inflation. 

A more logical cause of this price blip is that Western countries want to buy more than before from Kazakhstan, since they no longer can buy from Russia.  This will raise Kazakhstan’s export prices -- and consequently its domestic prices, since producers will shift output from the home market to the foreign one.  Kazakhstani consumers will compete for now-scarce goods by bidding up prices.  That, at least, is the theory.  In reality, Kazakhstan’s leading export, crude oil, is restrained by the recent fall in global prices to below $100 per barrel.  Consequently, this back-channel seems unlikely to fuel much inflation here.       

Money is no object?

Let’s round up the usual suspects.  The February devaluation must lead eventually to higher prices expressed in tenge, because the currency has lost a fifth of its purchasing power over foreign products.  A delay of several months in the inflationary consequences of a devaluation is not unusual, since the trade contracts must be rewritten to take into account the weakened tenge. 

And there’s the variable that Panorama, the statistical agency, and (above all) the National Bank rarely want to discuss – money supply.  Here the picture is mixed.  Over the last two years, the narrowest types of money – pure currency (M0), and currency plus transferable tenge accounts in banks (M1) – have been stable.  The total rates of change since August 2012 are -1.6% and 1.1% respectively. 

Broad money is something else.  M2, which encompasses M1 as well as transferable foreign-currency accounts, has risen 13.8%.  M3, an even broader measure of money, is up 29.3%.  In contrast, gross domestic product over the past two years has risen only about 9% in terms of output.  To the extent that people and firms spend broad money on goods and services, the potential stimulus to inflation is clear. 

But recognizing this possibility would require the National Bank, which is supposed to manage the money supply, to admit that it may be the villain in the inflationary story.  --Leon Taylor tayloralmaty@gmail.com

References

Panorama.  Uroven’ centyabriskoy ynflatsii mozhet stat’ kluchevim dlya peresmotra prognozov (September inflation may be key to forecasts).  October 3, 2014.

National Bank of Kazakhstan.  www.nationalbank.kz. The source of monetary data used here.

 

Statistical Agency of Kazakhstan.  www.stat.gov.kz.  The source of GDP data used here.