Not raising wages to match inflation | Local company

AS INFLATION rates climb across the Caribbean, Barbados Central Bank Governor Cleviston Haynes is cautious about salary adjustments to match it.

“Adjusting wages to match inflation is really not the first best option for us,” Haynes said during an inflation discussion hosted by the Central Bank of Barbados on Thursday evening.

Haynes said once wages rise, prices will rise across the board.

He observed that in Barbados they had experienced this in the late 70s and early 80s “where we tried to match price increases with wages and all you really had was inflation very high until probably the end of the 1980s”.

Caribbean economist Marla Dukharan has observed that the pressure of higher prices is universal, but disproportionately affects people at lower income levels and people on fixed incomes like retirees.

“And in those cases, I think the state needs to step in to make sure that the most deprived among us are supported appropriately,” she said.

Haynes explained that the lower income bracket will be hit hard by inflation “because they spend more time and more income on food than those with higher incomes.”

Haynes said the region was importing inflation, with 40% of the region’s imports related to food and energy.

“So if you have significant price increases in those areas, it ripples through our economies because the Caribbean economy is interdependent with the rest of the world,” he said.

“And what you have to understand here is that the supply shock that we’re facing right now is largely affecting food and energy. The most expensive items have been food and energy and that’s what really drives up the rate of inflation.

In some countries the focus is not on the headline inflation rate but on what they call the core inflation rate, i.e. you take out food and energy because those are things that you really have very little control over, and then you try to focus on the underlying inflation rate,” Governor Haynes explained.

“So in terms of how we approach the impact of these prices on the average citizen, it’s really about being able to frame targeted measures that are perhaps time-limited, because increases in food and energy price increases are really likely to be transitory,” he said. .

He observed that oil prices are traditionally volatile and are expected to decline at the end of the year or in 2023.

“So we run the risk of trying to have wage increases that adjust to inflation, which is a temporary cycle. And when those things change, you’ve already built in those pay increases, and therefore they’re harder to reverse.

So you need, I think, perhaps time-limited transfers. So you can do it for a period of time, to allow people to adjust, but it’s not a permanent feature of government spending or the tax or tax system,” he said.

Bank of Jamaica Governor Richard Byles echoed that sentiment.

Byles said that in Jamaica, for the month of March, the country recorded inflation of 11.3%, of which 76% is attributed to food and energy.

“So I think Governor (Haynes) has made a very important point in dealing with salary expectations that are genuine and need to be met. We have to do it in a creative way that allows when inflation deflates or when we have deflation that we don’t get stopped with these high costs at the top,” he said.

Dukharan said wage adjustments should match productivity.

“Employees who are currently engaged in wage negotiations or the unions negotiating on their behalf will likely demand wage increases commensurate with inflation.

However, one important thing to remember is that in the absence of increased productivity, wage increases that simply reflect inflation and are completely decoupled from performance, will only serve to return what you produce. uncompetitive over time and drive you out of the market. , which benefits no one. We need to make sure that when we negotiate higher salaries, we also add greater value,” she said.

As the inflation rate in the United States hit a 40-year high, the U.S. Central Bank announced its largest rate hike on Wednesday, raising its benchmark interest rate by half a point. percentage, to a range of 0.75% to 1% after a smaller increase. in March.

The Indian central bank also announced a surprise increase in its key rate.

Meanwhile, Australia’s central bank recently decreed its first interest rate hike in more than a decade.

“Inflation is way too high and we understand the difficulties it is causing,” Federal Reserve Chairman Jerome Powell said Wednesday at a news conference in Washington.

“We are moving quickly to bring it back down.”