Christmas gloom in Jamaica

The surge in consumer prices worsened in October setting up Jamaicans for a financially difficult Christmas season as basic items like food and the cost of transportation continue to rise. Businesses are also starting to worry that it will affect wage negotiations which are yet to be settled.

Prices to consumers jumped 8.5 per cent in October compared to a year earlier, leaving families facing their highest inflation rate since 2013, according to data from the Statistical Institute of Jamaica. From September to October prices jumped 1.0 per cent. In the previous month prices rose 2.3 per cent.

Faced with this data there is added pressure on the Bank of Jamaica (BOJ), which has already signalled that it could increase interest rates for the second time this year when its Monetary Policy Committee (MPC) meets to consider interest rates today.

At its last meeting, on September 30, the MPC voted to increase the central bank’s key policy rates by 1.0 per cent. That was the first time interest rates had increased since 2008.

Dr Adrian Stokes, member of the Private Sector Organisation of Jamaica Economic Policy Committee, said he expects that the BOJ will raise interest rates again today, based on its signal in September.

Septimus Blake, president of the Jamaica Bankers’ Association (JBA) and CEO of NCB Jamaica, shares the sentiment about the expectation for the central bank to “tighten rates again based on the inflation trend”, but added that he hopes it doesn’t get entrenched. More than the raw inflation data, Blake said he closely watches the survey on inflation expectations  that is, what level of inflation people are expecting in the economy over the next 12 months.

The last publication from the BOJ shows CEOs, managing directors and financial controllers expect prices to move by 7.4 per cent in the next 12 months, well above the top of the BOJ’s target range of four per cent to six per cent.

Blake says if inflation expectations hold at that high level over the next few quarters it could become dangerous.

“When you start to see a rise in inflationary expectations it can become entrenched, because once people go into wage negotiations with the expectation for higher inflation, that is going to be part of the discussion inevitably,” Blake pointed out. He, however, added that while “the Government has settled a majority of its wage negotiations with the public sector, if it has further ways to go, workers will start to indicate to the trade unions that, with the cost of living rising, they will not be accepting a four per cent increase and that will start to change the negotiations”. He said unions negotiating for private sector workers are expected to follow suit.

So far, the cost of basic food items have been outstripping the headline inflation rate. While the data show inflation in the past 12 months reached 8.5 per cent, the cost of food alone has gone up 12.9 per cent since May.

In September alone the price of chicken rose five per cent. Ham prices for this Christmas are also set to rise. Chief supply chain officer at GK Foods Division Dianne Robinson, speaking to Kalilah Reynolds recently on Taking Stock, said supply chain issues are challenging the company in trying to hold the prices of ham this Christmas, adding that efforts are being made to keep the increases on inflation-weary consumers “below double digits”.

Jamaica Broilers Group CEO Christopher Levy says the price increases consumers are seeing are not over yet. He, too, said the inflation rate the country is now seeing could start to impact wage negotiations and the cost of money  that is the interest rates. However, JBA’s Blake said banks have not started to pass on the increase in interest rates, because it is at a low level now. BOJ policy rates are at 1.5 per cent, but Blake said, once it starts reaching three to four per cent, the picture will change.

However, Stokes remains adamant that the central bank raising interest rates is a bad move.

“In a depressed economy, characterised by high unemployment and GDP [gross domestic product] being significantly below potential, the key to setting monetary policy is whether you believe the inflation you are seeing is of a permanent nature or you believe the price pressure will abate soon,” he argued.

He maintained that the inflation is transitory, meaning it is not expected to last long and will begin to dissipate sometime before the middle of next year.

Blake, however, questions how transitory the inflation is, saying some of the higher shipping costs which have been fuelling higher prices, not only in Jamaica, but around the world, were expected to start going down already, but still remain elevated. He said if he was at the helm of the BOJ he would raise rates to rein in inflation early enough before it becomes a problem which could be hard to control.

But for Stokes, “If the BOJ starts to move aggressively with interest rates, as it has done, then it is signalling to the market that it is having or will soon have an inflation problem on its hand. The unions will start to think this thing is not a short-term phenomenon, and we need to start negotiating higher wage increases in line with inflation, and what that does, unwittingly, is to create an inflation problem because you have signalled that you believe the prices we are seeing will be with us for a while.”

He said the central bank must be careful it doesn’t lead the economy into stagflation  that is where the economy is stagnant with high inflation.

“If inflationary pressures are imported it means that it will take a lot of effort from the BOJ, that is material interest rate movements to bring inflation under control. So what you are going to end up with is that the interest rates will slow the domestic inflation materially, while the inflation, which is largely coming from supply disruptions, will take a while to come down. So you will end up with an economy with high unemployment, low GDP growth, and elevated prices, which is the worse of both worlds,” Stokes said.

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