Consumer Price Index
The Consumer Price Index (CPI) is a measurement of prices of a basket of goods that the National Bureau of Statistics (calculating over 6,000 prices) believes is a good representation of goods purchased by the average citizen in Seychelles. The first thing to note regarding this statistic is that it is a subjective measure of average consumer prices because the computation changes, as was seen when NBS varied the basket of goods in January 2021. NBS aims to compile the most credible data for spending patterns of the people in the population and this is why NBS tends to alter the basket. A good example of how this data is subjective is the owners’ equivalent rent (OER) statistic compiled in the USA, which accounts for over 20% of the ‘all items’ CPI number, and is obtained through surveys asking homeowners that if they were to rent their own home, how much do they think rent will be. This is as opposed to collecting the actual rent and home sale figures to produce the components of Housing and Shelter. An article by Brett Arends articulates that rents may be rising three times as fast as ‘official’ inflation figures. For this reason, it may be better to look at these statistics alongside prices of imports and exports if this information is available.
According to the June statistics released on 7 July 2021, Seychelles’ core inflation rose 10.35% in comparison to USAs core inflation rising 4.5% (and 3.7% CPI year-to-date), displaying the vulnerability of Seychelles to inflation as a Small Island Developing State. Unfortunately, Seychelles can face greater challenges than only increasing producer input prices that pushes up the CPI, it can be vulnerable to the global trading currency exchange rates too which is exasperated during an export shortage and a trade deficit, such as when Seychelles’ tourism faces an adverse shock. All this means is that inflation in Seychelles is largely dependent on the global economy and whether the global supply shocks subside over the coming months. If global inflation does not subside there is the real possibility that stagflation may set in Seychelles and abroad, which is higher unemployment caused by rising prices.
Social Welfare and Real Wages
The effects of inflation are felt by the general population through diminishing real wages and social welfare. Social Welfare is calculated using the formula as described on the Seychelles Pension Fund website but is also a result of the average annual CPI through the Seychelles Pension Fund (Benefits) (Amendment) Regulations, 2018 (as an amendment of S.I. 3 of 2013), where the benefits are increased annually in line with the average CPI of the previous year. This increase, however, is capped at a maximum CPI rate of 5% and its recipients have inflation exposure at rates higher than 5%. As an example, if CPI is calculated at an average of 12% CPI for 2021 the purchasing power of the welfare benefits diminishes by 7% in the following year if inflation remains at 12%.
Real wages are affected because of the fixed nature of contracts and which are difficult to renegotiate, and because of the pressure enterprises feel on their bottom line as output declines with inflation consumption pressure. Wage increases are at the discretion of the employer and it is up to the employee to negotiate a reason for a wage increase. Employees are protected by the national minimum wage and section 39 (A) of the Employment Act whereas employers are protected with no mandatory price increases. If wages remain the same and the prices of the basket of goods consumed increases, this leads to the person only able to purchase fewer of the same goods or services.
Whether global inflation is transitory or not is a hotly debated topic, however the likely reality is no-one really knows whether inflation will be transitory because the circumstances are novel to economists and interested scholars. With the knowledge that there is even the possibility of inflation continuing into the months and years ahead it may thus be wise to turn to one of attorneys’ favorite laws – that of Murphy’s law. This old adage reminds one that ‘if anything can go wrong, it will’ and it is not treated as a matter of fact but allows for analysis and preparation for the worst-case scenario, thus less vulnerable to being caught off-guard. Applying Murphy’s law today, the numbers above suggests it may be time for employees and businesses to prepare for lasting inflation in the economy and to be aware of where they are vulnerable to rising prices – such as exchange rate exposure, rents, savings, and ailing community ties. As Warren Buffett famously once said ‘It’s only when the tide goes out that you learn who has been swimming naked‘. Don’t be the one swimming naked.
