The fire this time

 

If Space X impresses you, wait until you see inflation in Kazakhstan.  In October the annual consumer rate hit 18.8%, up by more than one percentage point from the previous month.  If prices rise continuously at that pace, they will double in less than four years.

Consumers and the government are egging on inflation.  So far this year, government spending has raised the money supply at the annual rate of 18.9%, reports the National Bank. (The money supply here is M3, which includes savings accounts as well as cash and debit accounts.)  Retail turnover for the first nine months of 2022 was up 15.7% over the same period last year.  The economy is white hot.  

A Keynesian folk legend says inflation matters less than unemployment, because if you have a job, you can pay high prices. But wages often lag consumer prices.  Unskilled workers have little bargaining power, and they cannot raise their pay to keep pace with inflation as torrid as Kazakhstan’s.  Their purchasing power will plummet. They may have jobs, but not much else.  And as prices keep rising, choking off aggregate demand, pretty soon they won't have jobs, either.

Last week the Bank raised the base annual interest rate, a benchmark for the economy, to 16%, from 14.5%, a huge leap. The Bank is grappling with the public’s sizzling expectations of inflation for the coming year of 16.9%.  When people expect prices to rise, they buy more now, creating inflation immediately.  To lower expectations, the Bank must cool off the economy by raising interest rates, which will discourage spending fueled by loans.  

And the Bank drily notes, “The overwhelming growth of budget expenditures in the current year requires a compensating reaction….”  This statement is remarkable.  When Nursultan Nazarbayev was President, the National Bank was a creature of the government. Indeed, under the Bank's charter, its governor serves at the President's pleasure.  Governor Galymzhan Pirmatov may be exerting a bit of welcome independence.  

The vise-like tightening of monetary policy may bring on recession.  Indeed, it is hard to see any other way that the Bank can lower inflationary expectations in a country that has never seen a rate of inflation below 5% since becoming independent in 1991.  Inflationary expectations have been building for more than two years, and the majority of respondents in a September Bank survey said they expected inflation to hold constant or rise.   But Astana may respond to recession by spending even more, aggravating the Bank’s headache.

The Bank has courage.  Will courage be enough?  –Leon Taylor, Baltimore tayloralmaty@gmail.com       

 

References

National Bank of Kazakhstan.  2022.  Inflation expectations: September 2022.  Report.  nationalbank.kz

National Bank of Kazakhstan.  2022. The base rate was raised to 16%.  Press release, October 26. nationalbank.com