The
West doesn’t worry about inflation. So
why should the East?
In rich countries, the rate of inflation – the
average rate of increase in all prices – is so small that it has almost
vanished from the economist’s radar screen.
In the United States, Europe and Japan, annual inflation is in the
neighborhood of 2% or less. From 2010
through 2014, the average rate of inflation was 2% in the US and .42% (that is,
four-tenths of 1%) in Japan, according to the World Bank. In the euro area, inflation averaged a mere .2%
in 2014.
Western inflation was generally placid as well as
low. A common measure of volatility, the
ratio of the standard deviation to the mean, was just .36 (or 36%) in the
US. The exception was Japan, which
suffered deflation in 2010-12; the ratio there was 3.2 (320%), mainly because
inflation suddenly rose to 2.7% in 2014.
But developing economies don’t even need radar: Inflation is visible to the naked eye. In Kazakhstan, it averaged 6.6% from 2010
through 2014. In Kyrgyzstan and
Tajikistan, inflation averaged 8.3% and 7.1% respectively. Moreover, inflation in those two countries
gyrated. The ratio of the standard
deviation to the mean was .61 in Kyrgyzstan and .42 in Tajikistan. Kazakhstan, on the other hand, has tended to
follow Russia’s pattern for inflation.
Russian inflation (7%) is slightly higher than Kazakhstan’s, and both
countries have little volatility. The
ratio of the standard deviation to the mean was .19 in Kazakhstan and .18 in
Russia.
The World Bank provided no data for inflation in
Turkmenistan and Uzbekistan, perhaps because the governments didn’t provide reliable
statistics. According to
tradingeconomics.com, the statistical committee in Uzbekistan reports an
average rate of inflation of 4.3% for the period from 2006 to 2014 and a rate
of 2.6% in the first quarter of 2014.
But the Asian Development Bank forecasts an inflation rate of 9.5% in
2015 and 10% in 2016. I searched for
inflation data in English or Russian on the Web site of Uzbekistan’s statistical
committee but found nothing recent.
In short, inflation in Central Asia may be high and erratic. Some economists shrug and point out that the
transition to markets has whipped up a tempest of uncertainty. In learning how to price, producers will
err. Given the Soviet legacy, they often
face little competition, so they will tend to err on the high side. Maybe 6% inflation isn’t so bad.
Where’s
the rub?
Maybe. But
post-Soviet governments often fail to report reliable inflation rates in a
prominent place. There’s the rub. The lack of information generates uncertainty
in economies that already have too much of the stuff. Pricing errors accumulate and may even lead
to a downturn.
A half-century ago, most economists thought that
moderate inflation was harmless. The
restaurants would have to print new menus with new prices, and gourmands might
wear out their shoes looking for cheap restaurants. But that was it. Inflation was not nearly as bad as
unemployment.
But in the 1970s, maverick economists, notably the
Nobel laureate Robert Lucas, pointed out that uncertainty about inflation could
cause unemployment, by obscuring the
ability of prices to signal changes in demand.
Among non-economists, this point remains obscure,
partly because newspapers misreport inflation.
If the price of oil rises from $60 to $66, reporters say inflation in
the oil industry is 10%. In reality,
inflation is the average price rise for all
industries, not just one.
Let’s
do the numbers
For example, suppose that a typical Kazakhstani buys
five pounds of meat and five bottles of kefir each month. (Yes, in reality she buys more groceries than
that, but let’s keep things simple.). The price of a pound of meat is 200
tenge; the price of a bottle of kefir, 100 tenge. Then the price of the bundle is 1,500 tenge
(5*200 + 5*100 = 1,500).
That was last year’s price. Now suppose that this year the price rises to
2,000 tenge – an increase of 33%. Then
the rate of inflation is 33% (see the Notes).
But this is an average price, not the price of a particular
product. In our example, perhaps the
price of meat rose from 200 to 300 tenge – a 50% increase -- and the price of
kefir did not change.
In reality, consumer baskets include hundreds or
thousands of goods and services, none of which is likely to dominate the basket
price. So we can think of a change in
the basket price as an average change for all commodities over time.
The price of a product may rise because of higher
demand, lower supply, or inflation. If inflation
hit all prices at the same time, then we could easily observe it and determine
whether it accounted for the rise in the price of our own commodity. For example, if the price of horsemeat rises
10%, and we observe an inflation rate of 10%, then we might infer that neither the
demand for, nor the supply of, horsemeat has changed.
But if we don’t know the rate of inflation, then our
habitual optimism may mislead us into concluding that the demand for our
horsemeat has risen, so we’d better process a few more nags. Only after we see our inventories of
horsemeat rising will we conclude that demand hasn’t actually risen; that our
price rose because of inflation. Now poorer
and wiser, we will cancel our orders for additional edible equines.
If enough industries follow this pattern, then
output and employment will rise and fall. That’s a business cycle.
In short, uncertainty about inflation can destabilize
an economy. The central bank can take a
long step toward stability by reporting inflation rates and, if they fluctuate
too much, by targeting them.
The National Bank of Kazakhstan does that, but not
all central banks in the region are so fastidious. Like Kazakhstan’s, the central bank in
Tajikistan publishes monthly inflation rates right on its home page. The Kyrgyzstani bank also publishes inflation
data but not conspicuously. The bank in
Uzbekistan doesn’t provide inflation rates in English or Russian. And getting economic data from the government
in Turkmenistan is like pulling teeth from a crocodile. The Web page of its central bank doesn’t even
provide a search button.
Until our radar systems improve, economic
instability may remain the order of the day in Central Asia. Or maybe we just
need somebody in the control tower who isn’t asleep at the switch. – Leon Taylor tayloralmaty@gmail.com
Notes
Governments usually express price indices, like the
Consumer Price Index, in terms of a base year.
In our example, suppose that the price of the Kazakhstani basket was
1,500 tenge in 2014 and 2,000 tenge in 2015. Then the price index is 100 in
2014 (the base year) and 133 in 2015.
The rate of inflation is calculated as the rate of change in this index
– that is, (133 – 100) / 100, or 33%.
The World Bank’s estimates assume a fixed consumer
basket over time; that is, the quantity purchased of each commodity does not
change, although the price does. This is
the Laspeyres method.
References
Asian Development Bank. Asian
development outlook. www.adb.org
Governmental Committee on Statistics in the Republic
of Uzbekistan. www.stat.uz
No comments:
Post a Comment