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Stark warning: winter is coming for Bermuda prices

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Bermuda’s inflation rate may be four times higher than the Government’s official Consumer Price Index, according to a Bermuda investment firm.

Anchor Investment Management also warned its investors that it expects inflation to stay at 5 per cent or 6 per cent while the Bermuda “Misery Index” will rise to a record 17 per cent this year.

The stark warning from analysts is that the Government is under-reporting inflation figures, and the future calculations will show a substantial spike in the Consumer Price Index.

Anchor’s messaging to investors seriously questions the accuracy of reported CPI figures.

“We especially take issue with figures recently reported for goods such as food and household goods,” their report states.

“We also do not believe rent is adequately being reflected, as commentary in the more recent CPI [consumer price index] reports from the Government seem to indicate non-rent control property rents have been falling for about a year while residential real estate inventory is scarce, and the residential real estate market has been red hot.”

The analysis in the October Bermuda Economic Update relies on research conducted by chief global economist Mark Haugen, MA, CFA; international business analyst Jeffrey Brewer; financial analyst Nathan Kowalski, CPA, CA, CFA, CIM; and tourism analyst Joel Duffy, CFA.

The report refers to the HBO series Game of Thrones, in which the motto of the House of Stark was “winter is coming”, meant to warn of an inevitable, and imminent change.

Anchor believes that change is here, that inflation, as reported, is about to change materially in a rather harsh way, judging by factors that include the rapid escalation of the CPI in the United States.

The Bermuda CPI usually closely trails the US index.

After looking at the existing comparison between the US figures and those reported by Bermuda, Anchor recalculated what the CPI figures should, or will be, assuming a lag in reporting versus CPI in the US, and came to the conclusion: “Our model suggests two points. The first will be apparent to some, and that is inflation in Bermuda is higher than officially reported.

“Anecdotal evidence suggests this is the case when one considers supply issues at some vendors and food product escalations.

“The second point is that, given the lag often seen in price pressure for the island, the CPI is set to print materially higher in the coming months.

“In fact, our model suggests we could easily witness five per cent to six per cent overall inflation even if the official statistics do not reflect this.”

Bermuda imports virtually all its goods, and rising shipping costs have meant that businesses previously paying $5,000 to $6,000 to bring in a container are now paying $25,000 a container.

That has meant that food, clothing and footwear, household goods and services components of inflation are expected to jump by at least high-single digits.

Anchor also notes that the rising crude oil prices will drive up electricity costs in the months ahead.

“Finally,” the report states, “the standard premium rate for healthcare in Bermuda was just increased 13.6 per cent, the FutureCare premium by 6 per cent and the Health Insurance Plan premium by 6.9 per cent.

“This will begin feeding into the healthcare component of CPI as well, contributing further to escalating costs in the near future. The combination of all these factors gives us confidence that the official inflation statistics are under-reporting what is happening, and we are likely to see dramatic escalations soon.”

The implications are broad. The Bermuda CPI is used for pricing, wage adjustments and trade union negotiations. If the figures are not right, it limits purchasing power for workers. Other inflation-linked contracts or services could also be tied to incorrect figures.

Anchor concludes: “Real GDP may turn negative, given it reflects the effects of inflation. While nominal GDP would be increased with price escalations, real GDP, which more adequately reflects the true prosperity of the economy, would not be accurate.

“The good news, in some sense, is that figures such as debt to GDP ratios, which are based on nominal values, would appear better, and debt would be easier serviced from inflated tax revenues if one assumes values in payrolls and duties correctly reflect the upward jump in prices.

“If our estimates are correct, Bermuda is about to see inflation numbers it hasn’t seen for more than a decade. This is coming during a period of economic malaise and will create an environment of stagflation.

“This can be graphically represented by the ‘Misery Index’, a composite index that simply adds the unemployment rate to the inflation rate.

“If we assume 5 per cent inflation and an unemployment rate like 2019, the Misery Index will hit a new high in 2021.

“The near-term outlook may be difficult as we begin paying more in a period of frustratingly low economic growth. Winter is coming.”

Jeffrey C. Brewer, Anchor Investment president (Photograph supplied)
Nathan Kowalski, CPA, CA, CFA, CIM, FCSI, is Anchor Investment Management’s chief financial officer (Photograph supplied)
Mark Haugen, Anchor Investment Management senior portfolio manager (Photograph supplied)
Joel Duffy, Anchor Investment Management fixed income portfolio manager (Photograph supplied)

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Published October 07, 2021 at 7:47 am (Updated October 08, 2021 at 8:23 am)

Stark warning: winter is coming for Bermuda prices

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