Rising inflation diminishes the economic and social well-being of consumers, especially people on fixed incomes: employees, retirees, students on scholarship, small business owners of nonessential products and services, and unemployed consumers on social benefits.
Presently, these adverse effects of rising inflation are affecting the Virgin Islands.
When inflation strikes, consumers experience a rise in the cost of living. This rise in prices affects consumer psychology, leading to falling confidence, pessimism and doubt. This in turn dampens consumer demand and can lead to recession and a contracting economy.
For believers in Keynesian economics — like this writer — consumer demand is the key decider in the management of scarce resources.
Okay. There is a power equation in inflation: Those with the power to transfer rising prices to others do so. The rest of us suffer the hit on our pocketbooks. Businesses that can pass on the rising costs of their inputs to consumers gladly do so and escape the harsh bite of inflation. Such businesses include those that supply energy, essential foods, hygiene products and so on.
Paradoxically, recession appears to be the single antidote to rising inflation as it forces consumers and suppliers to change behaviour.
In normal times, recession drives down prices as suppliers need their products and services to be competitive in a harsh marketplace. However, this is not always so.
Stagflation is rising prices coupled with recession. Stagflation is a worst-case scenario that appears when there is severe shock to the system like today, with rising inflation, pandemic and an unpredictable war. The oil crisis in the 1970s was a shock that created rising prices coupled with economic contraction.
The oil shock actually started the tide that took the world towards trickle-down, liberalism and austerity as economic religions: supply-side society. It also marked a hiatus in John Maynard Keynes’ stimulus-and-spend economics, a form of democratic socialism.
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