Welcoming Inflation in Cuba
Dmitri Prieto
HAVANA TIMES — Two weeks ago, the Cuban television program De economia y mas (“The Economy and More”) tackled the issue of inflation. Since such issues have never before been discussed in Cuba outside of expert circles, the show took me by surprise.
The show host touched on a number of details of inflationary processes, and explained why deflation can be as bad as inflation – and how the latter, in small doses, is not really harmful to a country’s economy.
When I watched the show (I did so because it comes right before the TeleSur news programs, some segments of which I follow), I recalled that the price of transportation between Guanabo and Santa Cruz del Norte (where I live) had just gone up. Deaf to the protests of passengers, first the owners of the vans raised the price from 5 to 10 Cuban pesos.
A week later, collective taxi drivers began charging not 10 but 15 pesos for the trip.
For those of us who must make the trip from Havana to Santa Cruz del Norte almost every day, that means a significant rise in costs, for there is no other reliable means of public transportation. The entire stretch is serviced almost exclusively by the private sector.
In Cuba, private transportation prices are “quantic”: very few are expressed in numbers that aren’t multiples of 5, and when prices go up, they also do so in multiples of 5, or 10.
We know that, generally speaking, the inflationary behavior of a country’s currency is a vicious circle: it sets in motion interdependent factors, making it easy for prices to go up collectively, but not so easy for them to drop (and lead to notorious deflation).
Could we be witness to the first symptoms of a process that will engulf our economy in coming years?
Please write more about Economic Integration, goodmind…
Your analysis of ‘good’ inflation and ‘bad’ inflation is correct. Unfortunately, Cuba is more likely to suffer from the bad kind because of the clumsy centrally-organized pricing controls. Man-made, as opposed to market-made, pricing schemes exacerbate the price fluctuations that should naturally follow increasing and decreasing demands for goods and services. In most cases, left to it’s own devices, price corrections, including minor inflation, serve to equilibrate supply and demand. The Castros pricing controls however pervert the market by keeping prices too low or raising prices to high too quickly.
Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or shortages in available supplies. A long sustained period of inflation is caused by money supply growing faster than the rate of economic growth. High rates of inflation and hyperinflation are caused by an excessive growth of the money supply.
In Cuba’ case, the rising input of foreign money in the form of spending from tourists and remittances from ex-pats, has caused a surge in the money supply. Meanwhile, the endemic inefficiencies of production result in shortages of basic products (such as toilet paper).
The result is a decline in the value of the Cuban currency. Each month, the peso is worth less than last month. One consequence of this process will be an increase in hoarding, as people fear a given product will be too expensive for them to buy next month. Thus spurring further inflation.
The rumoured coming of the unification of the two Cuban currencies will add to the money over-supply problem. Cubans will have a bumpy ride ahead.
Deflation is actually much worse on the economy than low or moderate inflation. If people know that prices will be lower next month, they will put off purchases this month. And so on. Business transactions stop, orders for new products are not placed, workers are laid off, and the economy grinds to a halt. You don’t want to go there.