EDITORIAL – Inflation: The silent pickpocket

Recently released statistics on inflation may have come as no surprise to Cayman Islands residents whose wallets lately have seemed a bit lighter.

As the Compass reported this week, the average price of goods and services increased by 3.5 percent in the third quarter of 2018, compared to the same quarter during the previous year. It was a continuation of a two-year trend, according to the Economics and Statistics Office. The annualized inflation rate, which averaged 4 percent through June of last year, was the highest half-year increase since June 2005.

In practical terms, that means that the dollar in your pocket will buy less now than it would in 2017, with the greatest changes noticed in housing and utilities (5.5 percent). Consumers, no doubt, have noticed the sharp spike in electricity costs, which rose an average of 23.3 percent throughout the first three quarters of 2018.

The Economics and Statistics Office calculates inflation through a Consumer Price Index – a quarterly tally of the cost of 2,227 basic goods and services, from food, housing and healthcare to communication, transportation and education expenses. In this snapshot, food prices increased by 4.2 percent; education costs rose 3.2 percent; and pharmaceutical and medicinal products by more than 2 percent – taking greater “bites” out of the paychecks of workers who did not see corresponding increases in wages.

Inflation is not unlike a current that carries a swimmer out to sea, or, at minimum, makes it more difficult to reach the shore. The current exemplar for extreme inflation is Venezuela, whose economy is imploding under pressure from deeply ingrained corruption, fundamentally erroneous public policies and runaway government spending. Venezuela’s inflation reached a mind-boggling 80,000 percent last year by some estimates, and 90 percent of the population is living in poverty, unable even to afford to purchase a dozen eggs.

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During the period of “stagflation” in the United States in the 1970s, many investors actually lost money as inflation outpaced stock market gains and annual returns on bonds. Hyperinflation left cash virtually worthless in Germany between the first and second World Wars, contributing to the collapse of the so-called Weimar Republic and the rise of Adolf Hitler.

Even on a far less extreme scale, inflation (and its kissing cousin, currency depreciation) can slowly but steadily strangle national economies and household budgets. Inflation tends to hurt the poorest among us, who already are subsisting on razor-thin margins. Inflation discourages saving and investing, or leads investors to take greater risks in search of higher returns.

Unlike larger nations, which can adopt and adjust monetary policies in attempting to manage inflation, Cayman’s government has few tools at its disposal to keep inflation in check. Our small islands are dependent on many external forces beyond our control (including, of course, our currency wisely being tied to the U.S. Dollar, and our local interest rates following the decisions of the U.S. Federal Reserve).

Cayman’s government can, however, have a direct impact on the “cost of living” and “cost of doing business” in the country. That means controlling or, ideally, reducing the following: government expenditures; duties, taxes and fees levied on individuals and businesses; and “hidden taxes” such as regulations, paperwork and inefficiencies in the public sector.

As residents’ purchasing power is diminished by inflationary pressures, officials should remember that every dime taken from the pockets of the private sector leaves that much less for savings, investments or, more simply, the monthly food bill.

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  1. The source of the inflation comes from beyond the shores of the Cayman Islands. The Cayman dollar is not an independent currency. It is a derivative of the U.S. dollar. Inflation is an increase in the supply of money and credit. Higher prices are a symptom of inflation. The source of the problem is Central Bank money printing, specifically the Federal Reserve Bank. The reality is Cayman has no monetary tools to combat inflation coming from offshore.

  2. Hilarious seeing the Compass’ not so subtle attack socialism in Venezuela
    Printing US (conservative) media talking points like the gospel
    “deeply ingrained corruption, fundamentally erroneous public policies and runaway government spending”
    Conveniently the editorial board never once mentions the international sanctions on Venezuela, and the volatility in the international oil markets which was supporting most of their government programs and policies perfectly well up until the oil market crash.
    A combination of multiple factors led to the current situation in Venezuela but to chalk it all up to socialism is perhaps the largest stretch I have read in this outlet in quite some time.
    Might I suggest including a modicum of nuance in future? The right wing talking points via the red scare 2.0 is a bit stale at this point.
    Cayman doesn’t seem like we are much better off under successive conservative governments, plenty of people are struggling here. Not to mention we are subject to the outlook of the global economy one downturn means years of decreased discretionary spending for individuals and entities effecting us via decreased tourism and investment and usage of offshore financial services.
    One major hurricane would put us back years.
    It seems unwise to cast stones while sitting in a glass house at the base of an active volcano.