Swinging for the bleachers

 

The sticker shock keeps getting stickier. The National Bank of Kazakhstan has just announced that the annual rate of consumer inflation in November was 19.6%, up from 18.8% in the previous month.  At the current rate, prices would double in three and a half years.

Monthly changes in inflation don't always mean much, because they reflect such seasonal factors as holiday spending. But Kazakhstan's inflation -- the average rate of increase in prices -- has risen for 12 months and has been in double digits since March.  See the graph.  The rule of thumb is that inflation should be around 2%.

 

                                         Source: Statistical bureau of Kazakhstan

In an informative interview with Forbes.kz, the deputy governor of the National Bank, Akylzhan Baimagambetov, noted that “most of price increases already realized are certainly due to external factors, particularly the disruption in supply chains, pass-through effects, high external prices for food, energy, services. In this sense, the foundation is foreign. This is what caused inflation to accelerate strongly this year.”

Yes, but the “high external prices” and pass-through effects (inflation conveyed through the exchange rate) are based on inflationary expectations.  When people expect prices to rise, they buy now, stoking them right away.  This may be why prices are accelerating.  Moreover, people form expectations out of experience. When they see governments habitually spend their way out of recession, they will anticipate that inflation will follow such recessions as the 2020 pandemic slowdown. Even short-run inflation has long-run causes.  

What did you expect?

To stop inflation, the National Bank must lower expectations.  Otherwise, inflation will continue to be a self-fulfilling prophecy. A central bank cools off expectations by cooling off the economy, that is, by discouraging excess spending.  It raises interest rates to make it expensive for households and firms to spend by borrowing.  

The problem is that the National Bank cannot act on foreign expectations—only on domestic ones.  These have a limited impact on domestic prices, because Kazakhstan has a small open economy, relying heavily on world trade.  Its prices are largely determined by the rest of the world.  Since the Bank has a limited sway over prices, it must raise interest rates sharply: Its lever is small, so it has to give it a good yank.  The same is true for other countries, particularly small ones. Consequently, the aggregate impact of the monetary crackdowns may be an unexpectedly sharp global slowdown.

For Fund and profit

Baimagambetov also discussed the government’s fiscal rule of accumulating oil profits in the National Fund. In principle, this steadies the economy, because Kazakhstan lives and dies by oil export revenues. When oil prices are high, it makes a lot of money and can afford to salt some of it away in the National Fund.  When oil prices are low, its income falls, but it can make up the difference by spending out of the Fund.  “This rule is already embedded in next year’s budget plan, and,” Baimgambetov added prudently, “everything will depend on how it is actually followed.”  Global oil futures prices, which reflect expectations, have exceeded $100 per barrel (for Oklahoma oil) all year. They haven't been this high since 2008. So this might be a good time to save oil revenues.  Yet government spending in Kazakhstan is increasing the money supply by almost a fifth per year.  President Kassym-Jomart Tokayev is spending too much, uncorking inflation. Will he now follow the fiscal rule?

–Leon Taylor, Baltimore, tayloralmaty@gmail.com

 

Reference

National Bank of Kazakhstan.  NBK Deputy Governor: Low rate in the current environment will bring us to a vicious circle.  NBK Deputy Governor: Low rate in the current environment will bring us to a vicious circle | News | National Bank of Kazakhstan