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Why 95% of Traders Fail

From Inflation to Imflation, Agflation and Munflation

Economics / Inflation Apr 06, 2017 - 02:11 PM GMT

By: Submissions

Economics Vakhtang Charaia and Vladimer Papava write: Inflation is an important macroeconomic indicator for the analysis of an established economic situation as well as forecasting the economic development for any country.

The “consumer basket,” which helps to indicate the consumer price index (CPI) or the average inflation rate, incorporates several commodity groups and given the correspondent weights encompasses different goods and services. Some of the commodity groups (e.g. electronics, new and used cars, furniture, hotel and restaurant services, etc.) fails to reflect the problem of the low-income population.



It is a fact that the inflation index and its internationally recognized and approved calculation practice regrettably fails to fully reflect the expectation of the population in developing and, especially, poorer countries as conditioned by the perception of the average price level. Moreover, this can also possibly cause the rise of negative emotions based on distrust among society. In particular, when the official low inflation rate is characterized by a significant price increase on essential products for low-income households, these negative emotions occur when the low-income group sees a price reduction for only lesser important products.

Under these conditions, a logical question arises concerning the kinds of problems which might occur when the main goal for a central bank’s monetary policy is only to retain price stability. This is known as inflation targeting.

In 1984, the Reserve Bank of New Zealand issued an act under which the desired maximum inflation level was set for the monetary policy which paved the way for the so-called inflation targeting. By doing this, New Zealand was the first country in the world to renounce the internationally recognized priority of the monetary aggregates and exchange rate. By 2006, there were 25 inflation targeting countries with the number growing to 62 by 2017.

Central banks employing inflation targeting frequently justify their decisions to do so and state that they have reached not only their desired target (price stability) but have also contributed to stable economic growth.

At the same tine, inflation targeting does have serious opposition. For example, Joseph Stiglitz, the Nobel Prize winner in Economics, is almost confident that this system will be changed because the central banks of developing economies are incapable of managing their inflation which is frequently imported (http://www.project-syndicate.org/print_commentary/stiglitz99/). In the opinion of Jeffrey Frankel, a Professor at Harvard University and a member of President Bill Clinton’s Council of Economic Advisers Economic Council,  the inflation targeting died and central banks have not yet decided what new commitment monetary policy should be given in order to become a new hope for stability (https://www.project-syndicate.org/commentary/the-death-of-inflation-targeting?barrier=true).

In order not to mislead a country’s population, its central bank, its government and business as well as for an adequate reflection of the reality in developing and mostly poorer countries, other indices must also be used together with the inflation index.

For countries where import exceeds export by several times, it should be clear that calculations must be made not only by the traditional inflation index but also according to their consumer basket made up exclusively of imported goods and services. Such an index can be called imflation which is a combination of two terms – “import” and “inflation.”

It is noteworthy that if targeting parameters also include imflation together with ordinary inflation, then central banks will need to adequately respond to the issue of national currency devaluation in order to prevent price increases of imported goods on the domestic market owing to the particularly large volume of import.

As is well known, agrarian inflation (or the growth of average prices for agricultural products) or the agflation index, becomes more and more popular in economics. The term “agflation” is relatively new and its introduction is associated with the substantial increase in the prices for fruit, eggs, grain and other commodities in 2006-2007. The agflation measurement is very important in developing and, especially, poorer countries which are characterized by permanent increases in foodstuff prices. It is noteworthy that agflation is not only a problem for developing economies. As is also well known, food inflation is not only higher, more instable, shows great volatility and lasts longer than non-food inflation, it also needs more time to adapt to new reduced prices which is unlike the process of price increases.

The agflation index use area is restricted because it fails to reflect the change in prices on such substantial spheres as medication and utilities.

Given that the population in poorer countries gives special attention to how prices of food products, medication and utilities (mainly water, electricity, gas and other fuels) fluctuate, the statistical indicator adequately reflecting these prices should be calculated.

Hence, we propose a new statistical indicator, munflation. This new term comes from the first letters of the English words – medication, utilities and nutrition.

The respective parameters for medication, utilities and food products from the consumer basket should be used for a munflation calculation. Food products prices are also used for the agflation calculation as mentioned above.

The issue of the possibility of extending the existing inflation targeting practice and studying the indicators of imflation, agflation and munflation in developing and relatively poorer countries, together with the inflation index, is the subject for a separate study.

The statistics office of a developing poorer country must calculate the imflation, agflation and munflation indices, together with the inflation index, which requires the development and practical implementation of a special methodology (especially for imflation and agflation).

The calculation of these indices at more or less perfect levels creates an objective possibility for the central bank of a developing poorer country to diversify the inflation targeting system with the imflation, agflation and munflation components.

Vakhtang Charaia is an Associated Professor of economics at Business and Technology University (Tbilisi, Georgia), affiliated lecturer for Institute for Strategy And Competitiveness at Harvard Business School, Head of the Ivane Javakhishvili Tbilisi State University Center for Analysis and Forecasting.

Vladimer Papava is a Professor of economics, Ivane Javakhishvili Tbilisi State University, a Senior Fellow at Rondeli Foundation – Georgian Foundation for Strategic and International Studies, a former Minister of Economy of the Republic of Georgia, and is the author of Necroeconomics, a study of post-Communist economic problems.

© 2017 Copyright Vakhtang Charaia and Vladimer Papava - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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