Why did food prices rise this year?

Dear Editor,

Macro-economic indicators provide good information on the health of a country’s economy. Basic indicators include monetary supply, price inflation and national income (GDP). The inter-play amongst these indicators and the likely outcomes are somewhat predictable. In a market economy, prices self-adjust based on changes in aggregate demand and supply. To some extent, changes in prices reflect changes in production costs. However, in Guyana’s case, it seems that prices change more in response to changes in consumers’ disposable income.

Guyanese know that every time the government or GuySuCo announces a pay increase or a bonus is given, prices automatically go up in the markets, even though there is no change in production costs, nor is there an increase in demand. Retailers simply adjust prices to absorb the excess cash that workers receive.

In mid-2015, there were some sudden increases in the prices for both locally-produced and imported food items. This should not have happened as the prices for agricultural inputs remained constant, or in some cases, actually fell (eg, fuel, pesticides, etc). With a slump in the gold price, more workers drifted back into agriculture, likely increasing production.   Food exports also declined, meaning that supply within the local markets would have increased, even if production remained constant. The bad weather changes that were expected did not materialise, and food production may not have been affected by weather, after all.

So what really caused the spike in food prices during the year? People have suggested many possible reasons, some of which are listed below:

  • Fears surrounding the outcome of the elections. Disruptions to daily life and access to food items were expected. Prices went up in anticipation of production being affected.
  • Expected shortages in food supplies, and consequential hoarding led retailers to increase prices while supplies lasted.
  • People expected that with a change in government, the promised increases in wages, along with reductions in VAT would lead to substantial increases in disposable income. Retailers prepared for the windfall by jacking up prices.
  • With regard to imports, many felt that with a changing of the guard, the loopholes in the import tax schemes would be blocked, and so the rumoured under-invoicing and paying of tax on some and letting the rest pass free would have to come to an end. Hence, some are saying that we are now actually paying the real price for imports.

Outside of these probable causes of food price inflation, there are two other significant sources which economists treat as logical explanations. When GDP increases it is normally accompanied by some amount of price inflation. But in Guyana during 2015 we did not have an increase in GDP; quite the opposite occurred. We actually had a reported 2.5% contraction in GDP within the year. Therefore, if we follow economic logic, we should not have had any price inflation.

The last likely cause is a little trickier to assimilate, ie, that which economists refer to as monetary inflation. This occurs when the government increases the local money supply by printing more currency. Whenever a country increases the volume of local currency in circulation, price inflation occurs. The most spectacular case of this occurred during the 1920s pre-Nazi era in Germany, when hyperinflation accompanied an almost unending need to print more money.

To prevent inflation, especially when there is a contraction in GDP, some economists recommend that there be a reduction in the money supply, roughly equivalent to the dollar-value of the lost GDP. If there are both GDP contraction and monetary inflation, it is very likely that price inflation can escalate.

In December 2013, the Bank of Guyana introduced the $5,000 note. Immediately, many persons speculated that some amount of ‘hidden’ inflation had caught up with us. At first, the public was very reluctant to accept the $5,000 notes and so the actual release of the new notes was initially slowed. However, since around mid-2015, persons withdrawing cash at banks could recall getting a lot of brand new $5,000 notes in the mix.

Could it be that local price inflation has something to do with a steep increase in the local money supply, caused by the vast amount of $5,000 notes added to the currency already in circulation?

Normally, when a central bank introduces a new currency denomination, there is a corresponding reduction in other denominations. Could it be that this did not happen in Guyana’s case; that the total value of $5,000 notes entering circulation was not matched by an equal reduction in other notes already in circulation?

It would also be interesting to see how prices will further change, now that the Americans have increased interest rates. After all, our external borrowing /debt, as well as imports are transacted in US dollars, the trading value of which will surely go up now.

Yours faithfully,

Khemraj Tulsie

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