Tuesday, April 22, 2008

feverish mind, scorching skies, and spontaneously combusting income

A long overdue post that has been fermenting for like three months and when do I decide to finally write it and post ? Yes, you guessed it (err probably not), when I'm operating on a fever with multiple system failures (not my computer, I mean my body with that) because it's the best excuse to have when someone calls me raving mad after this.

So whats the most appropriate topic to rave mad about when your temperature is setting new highs ? well inflation of course !

so lets start of with what is inflation ?

Economic condition characterized by an increase in prices and wages, and declining purchasing power. Inflation is usually measured by changes in the Consumer Price Index (CPI). The result is diminished purchasing power, and frequently a lower rate of savings as wage earners put more of their disposable assets in consumption, and less in long-term savings. Inflation is a monetary phenomenon. It occurs when there is too much money in circulation relative to the production of actual goods and services.

thats pretty self explanatory so essentially it means that everything becomes more expensive.

So what causes inflation ?

hmm... in that definition they mentioned something about an increase in money supply (that reminds me of something that happened here in '03, I wonder) , but what the hell does that mean anyways ?
thats just the tip of the iceberg of causes and only half of the views available from an economical point of view, but I'm just another average mo so lets consult with them pundits and see what they say since am mainly interested in sharp increases in inflation I'm gonna focus on that only.

So turns out that sharp increases in inflation beyond the fiscal policy estimates (about 3-4% for a growing economy) is attributed to the following:
  • Depreciation of exchange rate
  • Rapid growth of money supply: An increase in loans by banks and building society borrowing due to low interest rates or incentives.
  • Food shortages, increase in oil prices and lifting on subsidies when a country is Dependant on imports.
  • Increases in consumer confidence and home prices translated in a increase purchasing power.
  • Faster economic growth in other countries: economical growth is tied to inflation so while their services and prices are going they are not matched by the country and hence that is reflected in an increase in price of goods and services that isn't matched.
  • Rising labor costs: an increase in wages that isn't translated in an increase in productivity with strains the demand and supply relationship.
  • Higher taxes and increase in raw material costs.
So yeah I guess it was nicer when it was simply an increase in money supply, but those are the main reasons for inflation

So now that I'm done with that bit of background --rolling up my selves-- I'm gonna dig in and try to localize all of this in a nice way(as much as my delirium allows) . Hell i'm even talking Jordanian economics ... i just hope i don't come off the same way "dr." fanek comes off to me.

So what's up Jordan ( thats a definite hat tip here) ?

So let's see what is the inflation rate in Jordan ? It's 5.4% in 2007 thats a nice drop from the 6.25% in 2006, thats damn dandy !

2007? like last year ? like the year when i first started to feel the pinch. prices didn't increase ... oh wait ! remember in the definition of inflation they mentioned something called CPI (consumer price index) , what the hell is that ? do we have one ? how did they calculate the inflation in the first place ? Well lets pay the department of statistics a visit and see if there is anything about it.
OK, it's here . Great more numbers ! so essentially the CPI is calculating how families spend their money and how much is the increase in price of the commodities and comparing them to the prices of base year.

So lets take a look at the Jordanian CPI break down:
  • The break up of household expenditure is 39.72% on food, clothing and shoes 4.85%, housing and living expenses 26.40% ( of which is notable fuel and lighting is 4.29%, home related expenditures 16.93%, and rentals 15.77%. did i mention that rentals are mentioned twice in every year ?).
  • those expenditure break ups are based on survey done in 1998 and hence taken as the base year. they never change in all of the CPI calculation so it means that expenditure break ups are disconnected from inflation. hmm... maybe that last point is due to my fever ignore it.
  • After 1999 the base year is taken as 2002 in terms of prices of the products. so the base year for the CPI of 2000 is 2002. Our main export should be clairvoyant economics researchers.
I guess its just my tendency to be a philistine and be confused by number so i might have misunderstood somethings there and in the end they make perfect sense and the 5.4% inflation rate of 2007 will hopefully be reduced to around 4% this year, and i'm happy that i didn't let my fingertips go on and write the rest of my thoughts about the CPI.

Number munching gives me indigestion, give me the meat !

So I looked at the CPI and left me in more confusion ( I hope it made more sense to you), so lets look at the factors for inflation and how they relate to Jordan shall we ?

First of all the depreciation of currency, some how i feel like i talked about this before, so our currency is still worth 0.709 $ since it's pegged. So the depreciation must come from the dollar ? how is that doing lately ? Well the dollar lost about 38% of its value against the euro since 2003, and as of today it lost 11% of its value in the last six months. that means that saving accounts at banks are loosing value rather than gaining. In turn that is putting some pressure on the purchasing power of the JD since accordingly Jordan is an import heavy country when it comes to staples, food and oil. So check, we definitely are experiencing a considerable monetary depreciation.

In the past 5 years the number of banks offering their services to the consumers in Jordan has quintupled or even more. With that easier access to loans and other debt instruments became available, coupled by the real estate bubble and influx of immigrants helped to expand the money supply pool considerably in the span of a relatively short period of time. so definitely CHECK, we did have that plus the interest rates since they are pegged to the dollar have been near zero rates through out the decade and seem to continue based on the FED's latest woes and trends.

If you haven't noticed the consumerist shift in Jordanian society in the last 5 years then i'll just apologize on behalf of my fever, but for now i'll just say double CHECKS on that. As for other countries, lets see Europe ? china ? Saudi Arabia ? did I miss anyone of our main import countries ? or did I misunderstand that year over year they have performed better and better ? anyways I'll leave that as undecided just for fevers sake ( apparently, one symptom of fever is the repeating of the word fever. I'm so gonna suggest that to webmd)

While consistently higher taxes since 2004 has been the bi-annual diet of us denizens, the wage increases have only started lately. Did I miss any of the points ?

Oh right, there was that thing about food and oil prices. OK, so international oil prices increased more than 400% since September 2003 that must do something for inflation. While local prices have increased by more than a 100% (hey i can't remember/find how much the price of gas in jordan was in 2003 so if anyone knows please tell me). As for food prices, the problem has been brewing since early on in the turn of the century since the acts of deregulation and adoptiong of free market economics couple with "global warming" lead to a decades law in food reserves and it just happened that those condition kept on piling along others and only hit us real hard recently...CHECK !

So essentially we got a full mark on the inflation check list, damn we are good! so now that am done with the background, I'll tackle what has been done by the government and the citizens and other such things.... but i'll have be lucid for that so am off to nap and get better.

ENJOY!

ps. note a 4-5% inflation rate is expected and doesn't require a government to take drastic actions to fight inflation since fighting inflation comes at the cost of economic growth

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