Inflation
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.
