Rampant Inflation

October 16, 2023 10:03 pm | Posted in Features | Share now TwitterFacebook

On the 26 September, the Vanuatu Bureau of Statistics released the June Quarter 2023 Consumer Price Index update. This report is published quarterly and is used as an indicator of the inflation rate. The CPI is used to measure the changes in the prices of goods and services purchased by households over a period of time calculated from the monitoring of exactly the same goods and services each quarter. The change in prices is commonly referred to as the Inflation rate.

The inflation rate is used as a guide for economic decisions and government policy as it directly affects businesses and consumers. Business Houses also use this as a guide to set prices for the goods and services they provide.

The CPI Report

Inflation rate is 14.4%

The June quarter update when compared to the June quarter of 2022 shows a 14.4% increase in the Vanuatu Index. The CPI is calculated by monitoring changes in a number of groups. These groups are weighted to reflect contemporary household expenditure patterns.

The Trends. In the June quarter report, as compared to the previous 2 quarters the annual year-on-year changes in the CPI index for the various groups were as follows

The underlying inflation trend in Vanuatu is shown in the following graph which was also published in the report.

SO WHAT DOES THIS MEAN?

A high rate of inflation means that the purchasing power of the vatu diminishes. Less goods are able to be purchased for the same amount each time prices go up. In July 2022, after over two years of border closures as a result of the COVID pandemic, Vanuatu re-opened its borders and visitors returned. This led to an upturn in local business activity, the return of tourists and increased economic activity. Massive infrastructure projects that the government had undertaken to stimulate the economy continued, remittance revenues from seasonal workers surged and the tourism industry rebounded. This has led to a strain on resources with demand for skilled workers, and local inputs.

The graph showing the underlying CPI changes from 2019 to 2023 show a large increase in the CPI from the time that borders re-opened. At the end of 2022, the inflation rate for Vanuatu was 7.1%. Since that period, the CPI change has increased dramatically.

Food prices increased the most

Food costs increased the most out of all the categories in the basket of items used to calculate the CPI. Food has a 44.5% weighting in the calculation and experiences the largest increases. In the first two quarters of 2023, food prices increased on a year-on year comparison, 16.6% for the first quarter and an astonishing 24.8% for the second quarter. At the end of the third quarter of 2023, with inflation rate of food at 24.8%, local household were only able to buy three quarters of the amount of food that they previous could with the same household income. The CPI index for food from 2019 was 184.2 and at the end of the second quarter of 2023 was 283.9. This reflects a 54% increase in the prices of food.

The second highest increase has been the costs of health.

The Minimum Wage increase.

After prolonged public dialogue that began during the Snap elections of 2022, the government officially increased the Minimum wages from 220 vatu per hour to 300 vatu per hour. There was resistance from the private sector as the increased was seen as a dramatic and un-necessary increase placing a

further burden on the recovering private sector. In hindsight, after the release of the CPI date for the second quarter of 2023, the increase could not have come at a better time when

it was needed most. The increase from 220 vatu to 300 vatu was a 36% increase as compared to the increase in the price of food of 54%.

Future outlook

The underlying trend suggests that inflation is out of control and there does not appear to be any slowing. The high increase in food prices was compounded by the twin cyclones, Kevin and Judy in March 2023, which destroyed all market Gardens on Efate, but the trend was already in place in previous quarters before the cyclones. Market produce has now rebounded which will see prices of market produce going back to the precyclone periods. Some sectors of the private sector appear to have taken the increase in the minimum wage as a further excuse to increase prices which will apply more pressure again on inflation. With the current wars in Ukraine and Gaza, it is expected that the high rate of inflation will continue for the short term.

Internationally, worldwide inflation has become a serious problem which Reserve Banks have had to manage by tightening of Monetary Policy through the raising of interest rates. This tightening of Monetary Policy has seen worldwide interest rates increase dramatically since COVID ended. In Vanuatu, factors that have been driving inflation have been mostly external factors like the war in Ukraine, and high
Logistics costs. Interest rates appear to be stable with Bank reporting a surge in Lending and profits. Bank turnover tax which was reduced during COVID has now been re-instated to 7%.