Wednesday, March 27, 2013

Deconstructing Inflation in T&T

Every month T&T's inflation numbers are reported, however the public is never afforded the full picture with regard to its causes and its implications. Descriptions of inflation almost always surface as a nebulous scourge, an inconvenience that is inevitable and must be tolerated. Yet inflation is a consequence of economic intervention by government which hinders the markets from attaining general price stability.  

Simply consider; that if productivity or output in T&T were to remain constant nominal prices would only increase if the money supply in T&T increased. The steady expansion of the money supply unfortunately has been occurring in T&T since the mid 90s triggering constant inflation. Increasing the supply of money simply decreases the value of existing dollars in circulation. 
By doubling the quantity of money you double the price level. by tripling the money supply and you triple price levels. Prosperity is only improved when productivity increases not when money supply increases.


Source: T&T Central Bank

Devastating Effects of Inflation

Inflation has devastating effects on the majority of the population that often go unreported:
  • It punishes savers who are penalized for deferring gratification or delaying their spending.
  • It increases the incentive to spend money today as opposed to saving or investing for tomorrow.
  • It imposes hidden tax increases, as inflated earnings push taxpayers into paying more taxes.
  • Purchasing power is extracted from those on fixed incomes.
Wealth Transfer From The Poor to the Politically Connected

The most under reported phenomenon of inflation as a result of government spending is that it enriches the politically connected who are allowed to spend the money they receive first. Before the full effect of increased prices permeate the entire economy. 

For example when government goes ahead with a major construction project the additional money goes into the hands of the contractors (party financiers et al) and their employees. The first effect of these expenditures will be to raise the prices of construction supplies used and to put additional money into the hands of the contractors and their employees.


Contractors and their employees, then, will have higher money incomes. They will spend them for the particular goods and services they want. The retailers of these goods and services will be able to raise their prices because of this increased demand.

The retailers in turn will demand goods and services with their increased money income and will be
 willing to pay again higher prices for they will have more money, even as TT dollars have a smaller relative value.


When the government expenditure has trickled through the entire economy persons early in the game would have benefited from "more money income". Prices would have subsequently increased correspondingly but the country would have been no wealthier off than before. 


Tax dollars and purchasing power were simply transferred at the expense of the masses disproportionately to the politically connected business / contractor class. This occurs because they were the first groups to receive the additional money before prices have fully increased. 

Meanwhile fixed income persons such as pensioners, public servants, lower skilled workers with limited bargaining power find themselves compelled to pay higher prices for the things they buy thereby reducing their standard of living. 

Inflation - A Deceptive Regressive Form of Taxation 

Inflation is also a deceptive regressive form of taxation in that it disproportionately taxes the poor more than the wealthy similar to the VAT because a larger percentage of the poor's income is ultimately spent on taxes.

The next time you see inflation numbers published, think of it like a further increase in taxes -that will help put things in perspective.

4 comments:

  1. Interesting comments, but have you condidered the trend of GDP for the period 1991- 2012.

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  2. Replies
    1. Not exactly sure what your referring to but the same phenomenon serves to artificially inflate the reported GDP; essentially papering over poor economic performance.

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  3. Great Article! Re, 'It imposes hidden tax increases, as inflated earnings push taxpayers into paying more taxes.' You should make clear more of which type of tax is extracted from inflated earnings as income tax here is fixed for at 25%. Which is a piece of madness, but that's the topic of another conversation.

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