Inflation Wreaks Havoc on the Cuban Economy During 2022

Food prices in Cuban markets and establishments have only risen in the last two years. (14ymedio)

14ymedio bigger14ymedio, Elías Amor Bravo, Economist, 2 February 2023 — It’s the news of the day but let no one look for a single reference to the data in the communist state press. And that, despite its importance and that it has a prominent influence on the living conditions of the population. I am referring to the inflation rate of the Cuban economy in 2022, which has just been published by the National Bureau of Statistics and Information, ONEI.

In fact, the data are not good. In 2022, Cuba closed with a year-on-year inflation rate of 39.07%, one of the highest in the world and with very negative effects that the regime does not seem to know how to control or mitigate. This rate, without going any further, is almost 5 times higher than that recorded in the neighboring Dominican Republic, and almost 4 times higher than that of all Latin American countries.

Inflation also has very negative features if the behavior of the different components is analyzed. Food and non-alcoholic beverage inflation increased to a spectacular year-on-year rate of 62.95%, more than 30 percentage points higher than the average, and that of the Restaurants and Hotels component to 55.64%, another 20 points more.

The two rates have an intense impact on the increases in the index, with Food at 76% and Restaurants at 12%. The rest of the components have a lower weight in the year-on-year rate, and from an objective perspective the regime should know where it has to concentrate its efforts in the fight against inflation, but it does not, or what is worse, it may not know how to do it.

Other equally negative aspects can be pointed out from inflation in 2022. The most worrying was its acceleration throughout the year, which can be measured by the monthly variation rates. In December, the rate for the entire CPI was 3.74% in a single month, but in the case of Food it reached 5.66% and in the Education component (which is a public service of the state) the price increase in the month was 3.96%.

The upward profile of inflation throughout the year is detected when it is found that the monthly increases were smaller at the beginning of the year, growing continuously from the second half of the year. This is a direct consequence, not only of the shortage of supply of goods and services that it has been planning all year round about price tension, but also of the effect of greater public spending that increases as the year progresses, generating the problems of lack of monetary control that feed inflation.

But, in addition, inflation in Cuba over the last two years has broken the foundations of the functioning of the economy in a very prominent way. In 2021, the year-on-year rate was 77.3% as a result of the impact of the Ordering Task.* In 2022, it grew by 39.07%, as mentioned above.

To know the impact of this rise in inflation in two consecutive years, let’s think of a salary of 3,000 pesos on January 1, 2021. Its purchasing power at that time was equivalent to 3,000 pesos, but with inflation of 77% in 2021, that purchasing power in December was equivalent to 690 pesos.

Throughout 2022, with inflation of 39.07%, those 690 pesos would have become 420 pesos. In other words, the 3,000 pesos of January 1, 2021 would have an equivalent purchasing power of 420 pesos on December 31, 2022. The accumulated loss would be 86%. The purchasing capacity of Cubans, with the average index, decreased by 86% since January 1, 2021, but obviously it would be much greater if the data of the Food and non-alcoholic beverages component are taken into account. However, economists measure purchasing power with the general index, which has caused that erosion of 86% in salary, or pension.

This erosion of the purchasing power of nominal incomes also hits bank deposits and any other asset that Cubans possess, because inflation is an unfair, asymmetric tax, which hits the most disadvantaged groups more intensely, as is happening in Cuba. You have to imagine the distortion that requires business accounting to continually update income and costs so as not to lose competitiveness. A true chaos.

In addition, analyzing the individual behavior of the prices that make up the “basket” that defines Cuba’s CPI, surprising results are obtained. The products that see prices rise the most intensely are the basic foods red and black beans (13% and 10%, respectively), and toilet paper, 10.65%, another product of necessity.

Inflation falls harshly on the most disadvantaged groups, whose incomes and pensions are lower, to cope with these uncontrolled prices. ONEI emphasizes that tomatoes with a drop of 18% or peppers, with 5.8%, were the products that experienced the greatest price declines.

There is then miscellaneous data on price increases during the month of December for other products, such as pork, 8.1%, ham, 6.3%, snacks 7.8%, breakfast, 4.68%; in addition to the toilet paper already indicated is the application of dyes at 6.1%.

The data underpin the difficulty of the economic scenario, in which price increases are combined with lower economic growth, which points to a complex situation of stagnation, for which the solution can be much more complex. There is the sense that communist leaders are being condescending with the evolution of inflation and aren’t seriously engaged in fighting against a serious evil that distorts prices and wages, the value of assets — in short, the functioning of the economy.

 *Translator’s note: The “Ordering Task” is a collection of measures that include eliminating the Cuban Convertible Peso (CUC), leaving the Cuban peso as the only national currency, raising prices, raising salaries (but not as much as prices), opening stores that take payment only in hard currency, which must be in the form of specially issued pre-paid debit cards, and a broad range of other measures targeted to different elements of the Cuban economy. 

Translated by Regina Anavy 


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