mother likes to talk about the days when a weeks wages
was just six pennies, and how people would go to the shop
to make goods for the week, and get everything
for the table, including clothes.
Last week, we promised to explain some more on inflation.
It is about how much we pay for a basket of selected goods
now, when compared to how much we would have paid for that
same basket of goods in an earlier time period. But we do
not go far back.
All about prices
Inflation is about prices. It is an economic indicator of
the state of affairs in a country with respect to the ability
of ordinary people to feed themselves, as well as provide
ordinary items for the household.
Over an extended time period a base is developed
for the basket of goods. Economists scan the environment to
determine which items should be in the basket that serves
as the base for establishing how prices have changed.
Because consumer tastes change and innovative products come
into ordinary use, for example the computer, cellphone or
the DVD player, prudent economists from time to time, establish
what goods are in the basket.
What can happen in the basket is that certain items that come
to the market as high-priced items such as computers and DVD
players, become cheaper over the yearsa price reduction.
Hence some items in the basket are now priced lower and some
items have continued to show rapidly rising prices.
Headline and core inflation
This then brings us to the concepts of headline inflation
and core inflation. Simply put: core inflation takes the average
of all the goods in the basket. The new term: headline inflation
emerges when certain items in the basket are showing a price
behaviour that is outside of the ordinary curve or trend.
The market has been doing just that. The increase in food
prices are shooting up into the sky, way above the price increases
for other items in the basket. Therefore, the price of food
is in a way leading the basket, and so the term headline.
The Central Bank monitors these prices and develops tables
and charts that trace how the retail prices go up and down.
This is an indicator used to develop the Retail Price Index.
The Consumer Price Index is similar, reflecting the consumption
patterns in the country.
Financial planners know, on the basis of experience with their
clients, that in a majority of households a large percentage
of the income earned is spent on food. So if food prices are
running away ahead of the other increases, it hurts the household
more than anything else.
Consumers will forego spending money on new appliances, and
family trips to Mayaro and Tobago. Instead they will focus
on the necessary items such as food. They have no choice really.
Households may have to squeeze money out from other places
sometimes to avoid hunger.
Certainly it means cutting down on certain items in many households,
across the country. It means that savings are now being diverted
for immediate use. And there is a danger in that!
The most obvious is that long-term savings will dwindle if
wages and salaries do not also increase with the headline
But for now, I wish you a cheque wrapped up in ribbons and
bows, this Christmas, to put into your corporate pension plans
so you can pay for food and clothes in old age. Because, come
January 1, certain avenues that allow tax savings on contributions
reach a dead end.
Continued next week