In terms of living costs, the economy of the Commonwealth,
particularly Saipan, has undergone marked change in recent years as prices
have increased across the board.  The CNMI has become a very expensive
place to live and it is expected to become increasingly more so during the
remaining years of this decade.
    The higher prices observed not only result  from inflationary pressure
in the United States and elsewhere and increased shipping costs but also
because until just recently many distributors could not take advantage of
economies of scale with the result that the small CNMI market translated
into smaller volumes in shipping, warehousing and distribution. There was
little flexibility in the disposal of excess inventories which meant that
discount retailing, factory outlets, etc., have not usually been found in
the islands in the past. With the advent of new discount stores this could
change in the future. Competition, which elsewhere might tend to drive
prices close to production and distribution costs, has been  limited in the
Commonwealth.
       Other reasons for such high prices are related to greater costs for
doing business which can be considerably higher than on the mainland.
Commercial building costs, whether  leased or constructed, are higher and
most require air conditioning with the result that there are expensive
electricity charges associated with businesses. Premiums for typhoon
insurance are expensive and, in the case of perishable items such as
certain foods, higher rates of spoilage can be expected  all of which add
to the cost of doing business and which are ultimately  passed on to the
consumer in the form of higher prices. Those Saipan merchants that purchase
their American produced inventories from Guam are buying items for resale
that have been shipped to Guam on American flag carriers that have levied
exorbitant freights rates. The goods are subject to Guam port charges then
moved into warehouses. A Saipan merchant purchases the goods and back out
of the warehouse they come and another Guam port charge is imposed, then
the barge charge and finally the Saipan port charge all of which  are
applied to the items. These costs are passed on to local consumers.
       The Japanese have also influenced prices in the Commonwealth as the
Japanese traveler has become increasingly affluent. High prices for quality
goods and services are expected by the Japanese visitor with the result
that local businesses accommodate this expectation to the fullest extent.
This has also had an impact on local residents as it has resulted in higher
prices for the non tourist as well.
         Because of the unusually strong yen in relation to the dollar
which became a factor between 1986 and 1994, Japanese produced commodities
have become prohibitively expensive yet many merchants and others continue
to purchase such items. An example of the declining value of the dollar in
relation to the yen may be examined on the following table.
Year 100 Yen Will Purchase Year 100 Yen Will Purchase
1970 $0.28 1985 $0.41
1975 $0.34 1990 $0.69
1980 $0.44 1995  $1.00
      Economists use the term “inflation”  to explain a persistent rise in
prices followed by the expectation that the increases in prices will
continue. While the usual measure of inflation is the Consumer Price Index,
the term actually describes the state of an area’s price and cost structure
and is an elaborate assembly of commodity and service prices, wages and
other costs of production including the maintenance cost of assets. All of
which move in  relation to each other as changes evolve in cost and supply
pressures; consumer and business expectation;  government fiscal policies;
individual income and tastes; business profits, and foreign and domestic
competitive conditions. As a result of this mix of conditions some prices
fall while others rise. Another characteristic of inflation is that it
changes relative levels in prices. For example, if a pound of sugar is
twice the price of a pound of rice before an inflationary spiral it will
probably cost twice as much after inflation. If one-half days wages will
fill an automobile tank with fuel, it is likely that it will not do so
afterward. Inflation without changes in relative prices has never occurred
- if it did no one would much care. If retirement payments, wages,
utilities, rent,  profits and the prices of all goods and services
increased at the same rate, it would be a nuisance, but no one would be
hurt badly. Thus, the public’s concern with inflation is a result of its
effect on the movement of relative prices and incomes.
     Because all prices do not increase at the same rate or at the same
time, inflation changes relative prices and income at different times.  One
of the difficulties in maintaining the integrity of a consistent market
basket of commodities in the Commonwealth concerns the individual
merchant’s preference in the source of supply. Items sourced from the
United States are often more expensive than those obtained from Asian
countries, (other than Japan).  This is because of the high production cost
in the United States for certain manufactured items and the expense of
shipping such items to the distant Commonwealth market. To cite an example,
an electric fan manufactured and procured from the United States will be
more expensive delivered in the Commonwealth than an identical fan obtained
from an Asian source of supply.
     Individual price increases also push up the general level of prices. A
large increase in the price of energy will raise the price of almost
everything else. The immediate effect of pervasively higher prices for
goods and services accompanied by slow changes in the adjustment of wages
and salaries will result in reduced consumer spending for some goods and
services.
          Prices of individual goods and services are jointly determined by
buyers and sellers The market price will tend toward the price at which
desired sales are equal to desired purchases.  Market prices are increased
by events that reduce the quantity offered for sale at any particular price
(a decline in supply) or those that increase the quantity buyers offer to
purchase at any particular price, (an increase in demand).
     Aggregate demand may be increased by an expansionary fiscal policy; a
tax cut; an increase in government spending; an increase in the
population’s propensity to consume; an increase in the demand for local
products, (garments and vacation destinations) or by an investment boom as
witnessed several years ago.
    Several events that can reduce aggregate supply include crop failures;
restricting imports by increasing tariffs; higher minimum wages; government
regulations and pricing arrangements that interfere with the efficient use
of resources.
     Expectations also influence price structures. If people think prices
are going to increase they are often willing to borrow for the purchase of
costly items before the price rises even higher. And of course,
inflationary expectations often lead to demands for higher pay.
     We must watch Japan’s economy carefully. Presently, the weak dollar in
relation to the yen is very good for the Commonwealth’s tourism based
economy since a Japanese visitor can purchase more dollars for his vacation
payments with less yen. Currently he can purchase one dollar for about 100
yen. On the other hand those of us in the Commonwealth find Japanese
products cost more. It takes more of our dollars to pay for their yen
priced products.  If the strong yen maintains its position against the
dollar thereby making American purchases of Japanese produced goods more
expensive, the American consumer will not  purchase them opting instead for
U. S. manufactured products. Currently the U. S. consumer must pay $1.19
for 100 yen. If output falls in Japan because of reduced consumer demand
for its exports, the market loss will result in lost jobs, unemployment
will increase as workers are laid off with the consequence that vacations
and other discretionary expenditures could likely be postponed. Should less
tourists visit the Commonwealth, business sales would decline, profits fall
and with them - tax revenues. Less taxes means less government resources
for the provision of services and a corresponding need to cut government
expenses including payrolls. When it is all said and done - there are
really only two ways to make money: hold expenses and increase income
(sales). If that can’t be done then hold income and cut expenses. This is
true whether its business profits or tax revenue.

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