Sunday, September 23, 2012

Guam's relative inflation

I've been puzzled for a while now about why Guam's price level has, on average, risen relative to the United States up through a few years ago. If you look back from September 1996 through the present, the Consumer Price Index (CPI) rose about 72% on Guam and about 45% in the states.  Relative prices rose about 19% on Guam relative to the states.

There is a major reason I don't buy the theory I summarized recently. Basically, in order for the story about debt levels and the inflation to hold, it would amount to demand-driven inflation, which is belied by the levels of employment over the last decade. The theory would suggest that an economy which is at full employment overheats because it has a structural budget deficit. But... there aren't any signs of Guam's economy overheating. The labor market has had a lot of excess capacity for a long time.

My main suggestion, instead, is that the rising price of oil explains virtually all the relative  inflation. Look at it this way: Guam's consumer goods are generally imported and one of the main marginal costs of transport is the fuel that ships must burn to reach Guam's port. You may ask, "But surely the states also uses fuel for shipping, so how can that cause higher inflation in Guam than the states?" Things travel farther to come to Guam. Once we've accounted for rising fuel costs, this basic model implies relative price deflation over the last decade or so. That fits much better for our demand-deficient position.

We are in a depression and have been for a long time (although it has recently gotten worse). In fact, the employment-population ratio, which is the favorite measure of some economists in measuring the performance of the labor market, was at its lowest point on record this March. In fact, the year on year change is the second worst that we know of (#1 is September 2006-2007). Anybody who thinks the unemployment rate going down from March 2011 to March 2012 should think about this: the unemployment rate went down because people stopped looking for jobs.

If only there was something that could "stimulate" Guam's economy and put us on track to provide enough jobs for those who want them. Maybe this or this could help.

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