Inflation at 30-Year Low

Jamaica’s inflation rate is at a 30-year low, with the figures averaging 0.33 % for the first three months of 2007. Data from the Statistical Institute of Jamaica (STATIN), shows a rate of 0.3 % for the month of January, followed by 0.2% in February, and 0.5% in March.
If the inflation rate continues at this pace for the remainder of the year, 2007 will end with an inflation rate of 4%, the lowest the island has seen in more than three decades. In fact, the last time Jamaica has experienced this level of price stability was in 1966, when more than half the current population was not even born.
The current low rate of inflation follows the 5.8% registered in 2006, which is itself one of the lowest rates of inflation in the past 30 years. This follows a period of very impressive inflation numbers where, aside from 2001 and 2003, the island’s inflation rate declined each year since 1995.
There are a number of factors accounting for this low level of price increases. To understand these it’s important to focus on the factors that affect Jamaica’s inflation rate.
For one, being a small non-oil producing economy, Jamaica is particularly exposed to changes in the world market price of oil. The country is still vulnerable to swings in the price of the commodity; however, the dependency is significantly lower since the signing of the PetroCaribe Initiative with Venezuela in 2005.
The PetroCaribe Initiative allows the country to purchase oil under a far more predictable regime. The result is that in addition to the far greater level of oil – price stability in recent years, the country is now more structurally equipped to handle price increases when they do occur.
Oil-price stability aside, the island is also significantly affected by changes in the exchange rate with the U.S. dollar; with increases in the exchange rate making it more expensive to purchase imported items.
For instance, an item that costs US$1.00 per pound would require J$50.00 if the exchange rate was U.S$1:J$50. If the exchange rate was to increase to US$1: J$60; the product would be more expensive to purchase with Jamaica currency, even though its price on the overseas market remained at US$1.00 per pound.
What this means is that increases in the exchange rate will lead to increases in the cost of goods and services that are imported. Said differently, increases in the exchange rate lead to increases in inflation.
Over the past decade, Jamaica’s exchange rate has been relatively stable; a factor which in turn has had a positive impact on the island’s inflation rate.
There is another major factor that has helped to keep a lid on price increases: agricultural output. Almost 60% of the island’s inflation rate is brought about through increases in the price of food and drink. As a result, increases in the prices of food items such as vegetables, fruits, yam etc. cause the inflation rate to rise significantly.
Agricultural output rose almost 16% in 2006; following a significant increase in 2005. The result of this up tick in agricultural output has been a much lower rate of increase in the prices of locally grown food items. This in turn helps to keep the inflation rate low. Agriculture industry insiders expect output in the sector to continue to rise in 2007.
There are two other factors that play a huge role in keeping the inflation rate low: interest rates and the country’s import and foreign exchange policies.
The government has consistently lowered interest rate over the past three years, on the back of better economic indicators such as lower inflation. This reduction in interest rates creates a virtuous cycle with the lower borrowing costs making it less expensive to purchase products on credit.
Products such as furniture, motor vehicles and other “big ticket” items are either less expensive to purchase or the rate of increase in their prices is lower. The same applies to all products purchased with credit cards.
However, arguably, the most important impact of the reduction in interest rates is the continuing slide in mortgage rates. With housing expenses one of the more important items in the calculation of the island’s inflation rate, the reduction in mortgage rates has had a positive impact on the current inflation rate.
But probably the most important factor where the inflation rate is concerned is the very nature of the economy itself. The Jamaican economy is by far the most flexible and resilient in the Caribbean region and as such is far more able to respond to external and internal shocks such as changes in the price of oil and reductions in agricultural output through floods and droughts. The case of Trinidad and Tobago is a good illustration where Inflation in some sectors surged above 60% last year, following a period of low agricultural output. Trinidadian distributors were not able to quickly tap the international markets to import the fruits and vegetables needed. Even if they were, foreign exchange restrictions would prevent them from being able to quickly respond to what is now a national crises in Trinidad and Tobago with the government announcing in recent weeks that it will be allowing two entities to import food items to both ease the shortages that now exist in Trinidad and Tobago while lowering prices. In Jamaica, distributors would have been able to respond to market forces with far greater flexibility.
With the economy better able to handle oil-price increases, the foreign exchange rate relatively stable, the cost of borrowing low and falling, the economy more responsive to changes and agricultural output continuing to rise, the inflation rate for 2007 is very likely to remain historically low.