No easy fix to inflation spiral, economists warn

The economic impact of the pandemic on consumers has become more pronounced with a decline in retail sales for the holiday period, but senior economists have said that there is very little the Government can do to loosen the screws of inflationary pressure.

Dr Peter John Gordon, economics lecturer at The University of the West Indies, Mona, told The Gleaner that the way to ease that burden is to reduce spending but pointed out that the weight of inflation, running 7.8 per cent, is linked to global supply-chain problems.

Gordon noted that there has been an increase in the cost of goods globally as a result of a significant rise in shipping costs. The slide in the value of the Jamaican dollar has worsened the end result for consumers, he said.

“I don’t know what the Government could do, because if people go out and spend more, then it’s going to drive the prices up even more,” Gordon told The Gleaner.

Gordon said the Government’s report that it is behind in its tax revenue target means that its hands are tied in terms of offering additional assistance to citizens.

“So there is very little room for manoeuvring,” he said.

His comments coincided with Barbados’ tax-free shopping day on Monday, which exempted consumers from paying the legislated 17.5 per cent value added tax on goods and hire-purchase sales.

Barbados’ Finance Minister Ryan Straughn said the initiative was to offer relief to shoppers who had been financially challenged over the past few years, thus allowing them to stretch their budgets.

The move triggered local debate on what assistance could be offered by the Jamaican Government, but Dr Damien King, executive director of think tank, the Caribbean Policy Research Institute (CAPRI), said it is unfair to ask what more could be done.

King, an economist, said that since the beginning of the pandemic, the Government has offered assistance through welfare programmes in the form of cash payouts.

“While it may not be commensurate with people’s needs at this challenging time, it must be weighed against the fiscal capacity to do more, especially since there are additional fiscal pressures with reduced tax revenues and greater health spending on the vaccination programme,” he told The Gleaner.

“So amidst all those constraints, one can’t be glib about whether they should have done more and better.”

On Monday, the Bank of Jamaica (BOJ) indicated that there is less currency in circulation at this time of the year than was recorded for the similar period last year.

The central bank said currency in circulation amounted to $215 billion at mid-December, $10.5 billion of which was added to the stock between December 1 and 17. Month to date, the currency in circulation is up 5.2 per cent; and 18.3 per cent year on year. The annual growth rate is tracking below the 30 per cent increase recorded in the stock of currency in the similar period of 2020.

The fall in demand for cash suggests a dampening of consumer appetite this Christmas.

“It’s a really rough time because for a lot of people, their incomes have been reduced because of COVID, especially people in the service sector,” Gordon said.

He said that the challenges are expected to spill over into the new year, with global inflation expected to continue on its current trajectory.

Gordon said the only question now is the extent to which inflationary pressures will continue to build.

He pointed out that initially, developed countries had indicated that the inflation trend was transitory and was caused by supply-chain issues.

“But now nobody is saying that. Everybody expects that inflation will continue for a while. We’ve seen the Bank of England raise rates recently. The US [Federal Bank] said that they are going to be cutting back on the buying of bonds.

“So, in essence, they’re going to be reducing the amount of money that they pump into the economy. All of that is an attempt to get a handle on inflation,” said Gordon.

kimone.francis@gleanerjm.com