To read the reports coming out of the National Bank of
Kazakhstan, you would think that it was time to break out the bubbly. The central bank has long sought, and missed,
an inflation target of 6-8% per year. In December, however, the Consumer Price
Index was just 8.5% higher than in the previous December; November inflation
was 8.7%. The Bank opines that inflation will drop “smoothly” to 5-7% by 2018. Mission
Accomplished!
Um, not yet. There may be more froth in the Bank’s
press releases than in the champagne. Here are a few gloomy thoughts:
First, two months of statistics do not a trend make.
Until November, the average rate of consumer inflation in 2016 was 15.9%, eight
times the rate that economists recommend in the West and the second most severe
episode of inflation in Kazakhstan since 2000 at least (Figure 1). The Bank
should wait at least a few months before declaring victory.
Second, the chicken entrails look inauspicious.
Producer prices last month were 15.5% higher than in the prior December, and
producer inflation in November was even higher.
Granted, producer prices are much more volatile than consumer prices;
still, the recent surge in input costs will eventually sock the consumer.
Most important, the Bank’s model for predicting
inflation is suspect. NBK has attributed
the double-digit inflation of 2016 partly to its decision in August 2015 to
stop controlling the tenge’s exchange rate. Once it was left to the forex market,
the exchange rate per dollar soared in a few months from below 190 to nearly
400. It’s now holding fairly steadily at 330 to 335. Higher exchange rates fuel
inflation partly by enabling dollar holders to buy more Kazakhstani exports, in
terms of tenge, than before. This rise in world demand boosts prices in
Kazakhstan since residents now must compete with foreigners for Almaty hotel
rooms and Caspian black gold. But this is a one-time boost in prices, because the
inflationary effects of the tenge float will eventually wear off. The Bank guesstimated
in May that we’d already seen the worst of it.
Heh. For an institution that professes a commitment to
low inflation, the Bank never seems to have much to say about money supply. In
November, it simply declared that its monetary policy was “moderately
restrictive.” But according to the Bank’s own figures, cash in circulation rose
by more than a third over the first half of 2016 – a torrid pace. (The
corresponding growth rate for 2015 was just a tenth.) Cash plus checks – M1, in
the Bank’s lingo – was up 42% (Figure 2). With more tenge pursuing each
product, prices can easily rise. Moreover, as long as the supply of tenge keeps
growing faster than production, prices will keep rising. December’s slowdown in
inflation may be an aberration.
So before we pop the corks, we may want to sip a few
more sobering cups of black coffee. Here’s
a topic for table talk: What is the Bank doing about the quantity of money? –Leon Taylor, tayloralmaty@gmail.com
Figure 1:
Annualized
rates of consumer inflation in Kazakhstan, Dec. 2000-Dec. 2016
Figure
2: M1 money supply burgeons in Kazakhstan, Dec. 2000-Dec. 2016
Notes
Since 2000, the period of highest consumer inflation
in Kazakhstan has been 2008, when the annualized rate sometimes exceeded 20% (Figure
1).
In Figure 2, note that the slope of M1 is steeper for
2016 than for previous years. This indicates that the rate of increase in money
supply was relatively high in 2016.
