Too much of a good thing is not always good
Inflation, or a general increase in prices of items for sale in our economy, had not been a major source of concern for local residents and businesses for some time.
Between 2013 and 2020 with the exception of 2016, price increases on Guam had stayed within 2 to 3 percent a year, a range considered to be manageable. Inflation was kept at bay even during the first year of the pandemic (1.7 percent in 2020), even with some items in short supply.
As the pandemic continued in its second year, prices started to increase more (3.8 percent in 2021), this time driven by increased spending by both the private and public sectors funded largely by billions of federal aid funds on Guam.
The latest Consumer Price Index report by the Guam Bureau of Statistics and Plans estimated inflation in the fourth quarter of 2021at 5.3 percent, meaning that the 168 items that Guam consumers typically buy were 5.3 percent more expensive during October-December 2021 compared to the same months in 2020.
We have not seen inflation at that level on Guam since 2016. The same report broke down the price increases by groups and sub-groups to see where the overall 5.3 percent inflation came from.
According to Guam Bureau of Statistics and Plans’ 2021 fourth quarter report, the most notable price increases were in food (10.5 percent) especially fish and seafood (29 percent); electricity (25.6 percent); motor fuel (32.9 percent) and medical care (6.1 percent).
For this year, many on Guam are predicting prices of many items to continue to increase and for inflation for the entire year of 2022 to be 6 percent or higher.
It is not clear if the increase in gas prices at the pump we have seen just this year alone (from $4.74 per gallon at the beginning of the year to the almost $6 per gallon since March 9) will reverse course soon or within this year.
Then there are indications that utility rates (electricity rates, in particular) are likely to increase as utility authorities respond to developments in the global oil market and anticipate a mid-term adjustment (or two) to the fuel recovery charge or LEAC.
With oil prices increasing in the U.S. and globally, it is just a matter of time for the cost of shipping items from the U.S. to Guam to increase.
To add to this, the costs of these items in the U.S. (not including shipping costs) have already been increasing, as U.S. consumers face higher inflation rates exceeding 7 percent since December 2021, with the latest figure of 7.9 percent for the month of February 2022.
More telling is the increasing trend of the Producer Price Index or PPI, which tracks the prices that U.S. producers or businesses pay to supply the items to the U.S. market as well as ship them to Guam. PPI estimates have been running above 7 percent since June 2021, close to 10 percent since November 2021 and at 9.8 percent in January 2022, according to U.S. Bureau of Labor Statistics.
It is therefore just a matter of time until these higher prices paid by U.S. producers or businesses will be partially or fully passed on to U.S. consumers and then, once they are shipped and arrive on Guam, to local consumers.
In effect, not only are we importing products from the U.S., we are also importing their higher prices, i.e., U.S. inflation, where the blame game has become interesting to watch.
Although Russia’s invasion of Ukraine was the most recent contributor to U.S. inflation, this problem started months earlier, even during the time when officials were selling the idea that inflation would be “transitory.” Since many have blamed the pandemic for everything, perhaps including the current inflation in this category might not be so bad if it were not misleading.
It is not the pandemic per se that drove prices upward, it was the handling of the pandemic. Yes, there were initially supply shortages but, more importantly, it was the overly generous pandemic and economic recovery U.S. federal funds that paid for increased direct spending by governments in the U.S. and Guam as well as purchasing power transferred to U.S. and Guam consumers, allowing them to buy a wide array of items whose prices have risen.
In hindsight and as far as inflation is concerned, these U.S. federal stimulus packages should have been limited to the $2 trillion CARES Act/Coronavirus Relief Fund of March 2020 ($1.85 billion for Guam) and the $900 billion CRRSAA of December 2020 ($526 million for Guam).
Federal spending packages that followed ($1.9 trillion ARPA of March 2021, $1.38 billion for Guam; and the $1.2 trillion Infrastructure Act of November 2021, $193 million for Guam) paid or will pay for too much spending, resulting in higher prices (inflation). In this case, too much of a good thing is not always good!
Dr. Maria Claret M. Ruane is a Guam economist. She earned her B.S. (with Great Distinction) and M.A. in Economics from San Jose State University and her Ph.D. in Economics from the University of California-Riverside. She has 30 years of professional experience in International Macroeconomic Development.