Mission Unaccomplished?

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

All data in this post are from the National Bank of Kazakhstan (www.nationalbank.kz).

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.