Inflation is a macro economic problem facing many economies worldwide. The 2008 worldwide recession has impacted on the worlds economy. There have been job losses, people losing their homes, organizations such as banks and lending institutions seeking bail outs from their respective Government. Jamaica has not been exempted from this economic down turn. Many of the countries industries including tourism, agriculture and manufacturing have been impacted by low arrivals in the tourism sector, few exports in the agricultural sector and high costs of production in the manufacturing sector. There are many end results attached to the recession facing Jamaica two of which are is high interest rates and high rates of Inflation. The focus of this assignment will be the latter that of high inflation.
Inflation impacts on the demand for goods in a country which in turn reduces governments ability to save and reduces the revenues they would receive through consumption tax. The social economic effects of inflation cannot be avoided; violence, high cost of living and an increase in Government welfare programs.
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This paper will seek to assess the problem of inflation in Jamaica with the aid of a news release entitled made available from the Statistical Institute of Jamaica. The article with the aid of several scenarios analyses several reasons Jamaica faces high levels of inflation and how the Jamaican Government can change this problem.
This research will discuss the types and causes of inflation and how inflation impacts price and the demand of commodities in Jamaicas economy with the aid of different economic models and graphs. The paper will also discuss strategies that can be put in place to correct the problem of inflation in Jamaica and how these strategies can help in curtailing the impacts inflation has on Jamaicas economy.
Summary of the Document Read
The document read as part of the research for this project is a news release prepared by the Statistical Institute of Jamaica. In the release it is stated that Jamaicas All Division Consumer Price Index was registered at 187.6 in September 2012. According to the release this index reflected a 1.9 percent increase in the rate of inflation over the past month the highest since the start of the 2012 calendar year. (Statistical Institute of Jamaica, 2012). The news release stated that The most notable contributor to this upward movement was a 6.3 percent increase in the index for division of Housing, Water, Electricity, Gas and other fuels due to an increase in the cost of electricityÂ. Education was the second highest contributor to inflation in Jamaica. This was due to an increase in purchases made for the new academic year which started in September and also an increase in tuition fees. (Statistical Institute of Jamaica, 2012). According to the STATIN news release The third highest contributor to Septembers Inflation rate was a 2.8% increaseÂ in furnishing and household equipment. Alcoholic beverages also recorded a high inflation rate so too did food and non alcoholic beverages recorded at 1.5 per cent. Clothing and footwear also added to the rate of inflation this category recorded 1.8 per cent increase. (Statistical Institute of Jamaica, 2012). Communication and other miscellaneous reached a 6.0 rate of inflation for October.
Inflation may be defined as an increase in prices of goods and services which leads to a fall in purchasing power. In other words as the prices of commodities increase consumer spending will decrease as money in that economy begins to lose its value. As inflation rises, every dollar you own buys a smaller percentage of a good or service (Nicholas Pell, 2011). According to the MacMillan English Dictionary inflation may also be defined as an economic process in which prices increase so that money becomes less valuableÂ
Inflation is identified as anticipated inflation and unanticipated inflation. Anticipated inflation is accurately forecasted and is therefore expected and can be prepared for. Unanticipated is inflation which has not been accurately forecast and therefore is not expected and cannot be prepared for. (Introduction to Macro Economics Lecture 6)
Causes and Types of Inflation
There are several types of inflation. These are demand-pull inflation, cost- push inflation, wage inflation caused by forced wage increases by union when companies must increase wages the cost of this handed over to consumers through increase in price of goods and services provided by that entity. Hyper inflation is another cause of inflation brought on by 100% price increases.. (Principles of Macro Economics, 2012). The two main types of inflation affecting Jamaica are Demand-pull inflation and Cost- push inflation. Demand-push inflation is caused by continuing rises in aggregate or total demand. (Sloman, 2008, p. 306). Increased total demand can be caused by things such as an increase in money supply, increase in Government purchases and an increase in exports. (CCCJ, Macro Economics Notes, 2012). There are periods when business entities increase the prices of their goods and services in response to increase in the total demand for goods and services. Sloman (2008) further stated that another cause of inflation is Cost-push inflation caused by persistent rises in cost production. (p. 306). In other words has the organization is faced with higher production cost due higher cost of raw materials they may respond by passing that additional cost on to customer by increasing the price of the commodities they produce. Cost push inflation is caused by two main sources an increase in money wage rates and an increase in the money prices of raw materials.
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Graph Showing Demand Pull Inflation
The graph above depicts the demand pull inflation as it relates to automobiles. As the market demands more automobiles shifting the demand curve outward the price increases so too does supplies. It can be concluded that all the price of materials used to create the automobiles such as steel also increases as car manufactures demand more steel in order produce vehicles.
Cost push Inflation
Cost push inflation occurs when there is a shortage of supply, labour raw materials or capital. The demand remains the same but because there are fewer goods the suppliers can charge more per unit. (Kimberly Amaelo, 2012). According to Kimberly Amaelo in her article The Intelligent Economist, Cost Push Inflation the above statement can only occur if the products and services are inelastic. When a product is inelastic demand is not affected by changes in price.
Cost push inflation many times is caused by monopolist. A monopoly is a market structure where there is only one firm in the industry. (Sloman, 2nd Edition, 2008). The STATIN news release stated that in the Electricity accounted for a 6.3% in the rate of inflation in Jamaica. The Jamaica Public Service Ltd is the main provider of electricity in Jamaica house hold and business entities, as oil prices increase the Government of Jamaica can do little in preventing JPS from increasing the energy cost.
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Figure 6.2. Graph showing cost push inflation.
The graph above depicts cost push inflation. The graphs shows that as total demand and supply begins to rise the cost of resources used to produce the commodities also rise when this happens it is referred to cost push inflation that can be seen on the graph.
How Inflation Is Calculated
The rate of inflation can be measured. The inflation rate in Jamaica is calculated by bodies such as the Statistical Institute of Jamaica and the Planning Institute of Jamaica. The rate of inflation measures the annual percentage increase in prices (Sloman, 2008, p. 303). Inflation is measured using price indexes which is used to measure over all prices of commodities in a given year. The consumer price index (CPI) is measured using a bundle of goods purchased monthly by typical consumerÂ (CCCJ, Macro Econ Lecture Notes, 2012). This is calculated using the formula in figure 1.1 below. The figure arrived at expresses the cost of the bundle purchased in comparison to other periods. Jamaicas inflation rate in 2010 was 12.4% and in 2011 Jamaicas rate of inflation was recorded at 12.7%. Inflation is calculated or measured for each year using the formula in figure 1.2 below.
CPI 2011= Cost of Market Basket in given year x100
Cost of market in base year Figure 1.1
Inflation Rate 2011= CPI2011-CPI2010 x 100
CPI2009 Figure 1.2
How Inflation Impacts Jamaica
According to the article ˜Brace for Higher Food Prices (Morrison, Jamaica Observer, 2011). In 2011 consumers in Jamaica were affected by increase in the prices of commodities such as flour, bread, rice and cooking oil. These commodities are general staple items used by both the upper, middle and lower income household. This can also be seen in the 2012 consumer price index (CPI) report released by the Statistical Institute of Jamaica where it is reported that the price of food and non alcoholic beverages increased in the last quarter by 1.5%. The increase of these items leads to the conclusion that many lower income households especially those on the poverty line were faced with higher cost of living and were unable to demand high levels of these commodities due to the increase in price. Inflation also causes an uneven distribution of wealth. This can be seen in the Jamaican context where as price increases the poorer class is affected by the inability to purchase necessary commodities as mentioned earlier and smaller entities are faced with the possibility of closing as production cost becomes higher. Inflation decreases potential Gross Domestic Production and slows economic growth. Debtors and creditors are also affected by inflation one however is more at an advantage. During inflation debtors gain while creditors lose this occurs as inflation reduces the amount that debtors repay as the value of the currency declinesÂ ( Teivan Pottinger, 2010). This can be seen in the Jamaican context whereas according to the Bank of Jamaica anticipation of inflation increases in Jamaica as lead to an increase in interest rates in many banks and lending agencies across Jamaica. It can be concluded that inflation leads to the devaluation of Jamaicas currency. Currently Jamaicas dollar is trading at $88 to $1 US dollar. Inflation also reduces the flow of investors into Jamaica hence reducing the countries earnings. As Jamaican dollar began to destabilize and inflation began to rise in the country many factories began to close down and many individuals loss their job. It can still be seen within the Jamaican context that inflation leads to unemployment. As companies are faced with high production costs to reduce some of the expense many have cut down on labour cost making many employees redundant and part of the unemployed pool. Inflation results in uncertainty. If prospective investors are uncertain of whether or not they can receive returns on their investments they may be unwilling to invest in the island. This can be observed in Jamaican context.
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A labour market reform is one of the ways that the Government of Jamaica can use to lower rates of inflation. These changes can be brought about through policies that will change working hours bringing about a growth in the area of part time employment and flexi working hours. This will allow the government of Jamaica to control labour cost in the country. (Tutor2u, 2012). The Government must limit excessive and unnecessary spending in order to reduce high rates of inflation. For example if the Government of Jamaica can reduce the amount of overseas trips by Government ministers to have discussions with overseas individuals and organization that can be done through video conferencing this will cut the travel budget by a percentage thus making more money available to finance other areas such as production. Jamaican economist such as Ralston Hyman and Dennis Howard believe that if the Jamaican Government increases taxation of higher income individuals and organization and luxury items and reduce the high taxes placed on commodities demanded by lower income earners will lead to reduction in the rates of inflation of these items. Price control measures including price-cap regulations is also an important factor in reducing inflation. Setting price ceilings which may be defined as the maximum price at which commodities can be bought or sold. Price floors is also including in price regulation the price floor may be defined as the minimum price at which a good can be bought or sold. Both policies have their advantages and disadvantages but both will to some extent aid in reducing inflation. Monetary policies put in place by the central bank such as increase in the interest rate will in effect cause individuals to borrow less and save more. According to economics help.org A higher interest rate should also lead to higher exchange rate which helps to reduce inflation thus making imports cheaper.Â Also for inflation to be reduced in Jamaica the Government must seek to end the monopolistic hold JPS as on the energy sector in Jamaica. The high cost of electricity increases the operational and production cost in Jamaica the costs are passed on to consumers in price increases of commodities. When the energy market in Jamaica becomes more competitive energy cost will be reduced by a fraction hence opening doors for more investments and increasing the production capacity of country. The increase in production will reduce Government spending in relation to the importation of goods that are high priced.
It can be concluded that inflation as many causes and affects that were analyzed in the research. Jamaica is currently being affected by a high inflation rate. Electricity, education and food and house hold maintenance items being the main factors resulting in high rates of inflation in Jamaica.
There are three main types of inflation demand pull, cost push and hyperinflation. The main causes of inflation in Jamaica are demand pull inflation and cost push inflation. The impacts of inflation are varied these impacts includes reduction in investment, high cost of living, increase in Government spending in relation to social welfare and uneven distribution of wealth with the island nation.
Inflation can be reduced in Jamaica by the Government taking steps to reform the labour market all taking steps place a higher level of taxation on items purchased by higher income earners. Other steps that can be taken include price regulations such as in acting price ceilings and price floors so that no one buyer or supplier can increase price. Cutting unnecessary Government spending alleviate high taxes which will reduce prices.