Stagflation is Bermuda’s biggest problem
It is not difficult to figure out that prices are rising in Bermuda, just as they are in the rest of the world.
When a carton of strawberries is in double figures, your morning cup of coffee suddenly costs 50 cents more or airfares for that long-awaited vacation are a couple of hundred dollars more than they were pre-pandemic, it is obvious prices are rising fast.
Indeed, David Burt, the Premier, told the House of Assembly that the price of ribs rose 28 per cent in a year by January.
Although both Mr Burt and Jason Hayward, whose labour and economic ministry now has responsibility for statistics, maintain that Bermuda’s measure of prices is accurate, it is blindingly obvious that this is simply not the case.
If prices were in fact rising at 2.5 per cent a year, Mr Burt would not be having to prepare a package of financial supports to help families put food on the table.
And it is not just food — although Bermuda’s supermarket owners warned months ago that food prices were about to rise because of a host of global problems.
To some extent, it does not matter if the Consumer Price Index is correct or not; the public know it and the Government knows it, which is why it moved to control fuel prices — both at the pump and, via the Regulatory Authority, at the electricity socket.
But in the absence of reliable data, it is exceptionally difficult to make good policy decisions, so when you don’t trust your main economic indicator, you are flying blind.
This risk is magnified when dealing with an economy such as Bermuda’s.
In the United States, efforts are under way to get inflation under control. But its economy is in a different place from Bermuda’s.
The US is experiencing rapid economic growth and full employment. Inflation is undoubtedly a major issue and price increases of the kind it is experiencing are unsustainable.
So something needs to be done. Inflation occurs essentially when there is too much money pursuing too few goods, thus driving up prices.
Raising interest rates reduces the supply of money, thus dampening demand and therefore prices.
But higher interest rates can hurt businesses that rely on credit; they may reduce their payrolls or employees, buy fewer goods or services themselves or decide not to build that factory or buy that computer system. This can bring on a recession with its attendant miseries.
The US Federal Reserve is betting that the US economy, which is expanding at present and enjoying full employment, can handle higher interest rates without sparking a recession. Whether that is possible is a topic of fierce debate.
But Bermuda’s economy is not booming and is far less diverse as well. While the international business sector remains fairly vibrant, the tourism industry is only slowly coming back and remains constrained by the continued closure of its largest hotel among other post-pandemic factors, including limited airline flights and high airfares.
Getting accurate employment figures is notoriously difficult, but Mr Hayward recently said youth unemployment was running at 30 per cent.
That at the very least proves Bermuda’s economy remains fairly weak.
So hikes in interest rates — and local banks are already following the Fed — pose a much greater risk to the Bermuda economy and employment.
Since there is little the Bermuda Government or the Bermuda Monetary Authority can do to control interest rates, it must look elsewhere to try to get prices down.
Mr Burt has suggested that the Government’s decision to reject applications by the island’s fuel companies to raise the price of gasoline and diesel has helped to keep inflation under control. The Regulatory Authority also cut a rate increase by Belco in half to a still high 8 per cent — three times higher than the official inflation rate — which should also have helped.
Even these efforts have been criticised. Economist Craig Simmons has pointed out that the price controls tend to help wealthier people who are more likely to drive farther than poorer people. He suggested a straight cash handout would have been more effective, and that in fact is now what Mr Burt has promised by July 15.
While price controls are important to prevent monopolies and cartels from price gouging, they also contain risks — if they cut too deep, it may become uneconomic to sell the goods, or businesses may take other steps such as cutting jobs in order to stay viable.
If controlling the fuel price is going to be a policy — and there is a place for it — then cutting Bermuda’s eye-watering customs duties would be a better place to start.
Indeed, there is a good argument to be made for lowering customs duties across the board, provided that businesses could be made to agree that their prices must also fall. Again, Mr Burt is now proposing to cut duties on more essential foodstuffs.
But wider duty reductions would both cut costs and increase the sale of goods and services, thus boosting the economy at the same time that costs are contained.
The problem, of course, is that the Government risks having its own revenues fall, and thus finds itself short of operating funds, or having to borrow yet more money — just as interest rates are rising.
That is a genuine and serious risk, as is the problem of giving direct financial support to needy families. But the alternative is little better.
All of this is compounded by Bermuda, as an importer of almost everything it consumes, having little control over most prices. Even its ability to control fuel costs is limited. While it can place caps on fees for gasoline at the pump or electricity, it cannot control the price of jet fuel, which directly affects tourism and international business, or the cost of fuel for the container ships that are Bermuda’s lifeline.
And it has no control over the cost of most goods as they leave the factory.
As a result, it is difficult for Bermuda to be competitive on price unless it does something to control locally generated costs.
As a result, it needs to find other ways to manage inflation, or to expect a modicum of inflation in return for economic growth.
At the moment, Bermuda risks having stagflation, which is the worst of all worlds because it means prices are soaring while growth is flat.
So the real need now is for Bermuda to get the economy going — more and better-paying jobs will help to ease inflation, especially if those jobs are in international business and tourism, meaning the people paying for those jobs are outside of Bermuda.