Inflation Q for frederic

mondongo

Bronze
Jan 1, 2002
1,533
6
38
With money supply growth at 35%....the recently reported "basket-of-goods" inflation of 27%......the near triple digit pay increases that some govt workers are demanding...the increasingly large debt service payments as a percentage of GDP....the usage of large amount of govt funds for non-productive means (social clubs for the congress....susbtantial pay increases for the military)....when will inflation accelarate from the current single digit annualized levels? what is a normal spread between current inflation and interest rates on short term bank certificates?

thanks in advance,
mondongo
 

frederic

DR1 Expert
Jan 1, 2002
93
0
0
Eye on Inflation

I expect inflation to be at least twice higher this year than last year, but it won't show until the middle of this year, say around July or afterward. There is usually a lag of around 9 months between the increases in money supply and prices. However, one has to take into consideration that money supply in the DR is not only in pesos, but also in dollars, thus Central bank statistics are incomplete, since they only reflect the Peso Money Supply. This is why you can have the peso money supply expand drastically and not have a consequent rise in inflation. The reason is simple; if the Dollar Money supply expands slower or decreases, then the total money supply will not expand at the same rate as the Peso money supply, but less.

Regarding the usual spread between interest rates and inflation, there seems to be very little correlation, usually; except in very dramatic situations. If inflation rises, interest rates will rise, but not in a very correlated way, but depending on a number of discrete and exogenous factors.