What is Driving Jamaica’s Historic Inflation Levels??

By: Jelani Atkinson, Financial Analyst Posted:

On Tuesday, April 19, 2022, the Statistical Institute of Jamaica (STATIN) announced that the 12-month point-to-point inflation rate was 11.3%, the highest level since it measured 11.7% in December 2010, and the largest point-to-point change since the implementation of the new CPI basket in April 2020. The increase in overall price levels was mainly attributable to upward price movement in “Food and Non-Alcoholic Beverages” (14.7%), “Housing, Water, Electricity, Gas, and Other Fuels” (9.6%), and “Transport” (14.3%). The inflation rate for the fiscal year 2021/2022 was measured at 11.9%. The many domino effects of Russia’s invasion of Ukraine are largely to blame for the drastic inflation that has been observed in Jamaica and across the globe.

Firstly, Russia is the world’s second largest exporter of crude oil and the fourth largest exporter of natural gas. In an effort to sanction Russia and deliver blows to the country’s financial standing, some of the world’s largest economies have imposed outright bans on Russian oil purchases, including Australia, Britain, Canada, and the United States. Major economies in Europe such as Germany have also agreed to substantially reduce their dependence on Russian oil in lieu of an outright ban. As such, Russia has been largely unable to maintain its supply of oil and natural gas to many major economies, constricting the overall global supply of the precious commodities. This has quickly led to a significant spike in fuel & energy prices, with the price of oil reaching as much as USD$139 per barrel on Sunday March 6th – the highest in almost 14 years, according to the BBC. These elevated costs have been easily passed on to local consumers in Jamaica – with the Office of Utilities of Regulation (OUR) warning consumers about the coming increases in electricity bills due to the Jamaica Public Service company’s dependence on crude oil to produce electricity. Fuel prices at the tank have also risen consistently since the invasion began on February 24, with Gasolene 87 prices reported by Petrojam increasing 7% from J$180.65 on February 24 to J$193.89 on April 21.

Furthermore, on the back of supply-chain, logistics, and freight difficulties that accompanied the height of the COVID-19 pandemic, rising oil and energy prices due to the Russia-Ukraine conflict have introduced further shipping complications and price increases – which have translated into higher costs for imported food items.

Additionally, Ukraine and Russia are both major exporters of basic food items, including wheat, sunflower seeds, oats, barley, and corn. The war has destroyed infrastructure and closed ports Ukraine, while Russia’s ability to export and profit from its grain production has been impeded by Western sanctions. As a result, the global supply of grain, wheat alternatives, and wheat related products has decreased, translating into a local increase in the prices of related products. This includes higher prices for meat as higher grain prices have increased the cost of production for meat farmers.

Outside of the economic consequences of Russia’s invasion of Ukraine, inflation has been augmented by the gradual reopening of the Jamaican economy as we transition out of the COVID-19 pandemic. The reopening should aid the continued recovery of domestic demand, which may potentially drive price levels higher.

The resulting inflation level is well over the Bank of Jamaica’s (BOJ) target inflation rate of between 4.0%-6.0% and is expected to persist throughout 2022 and into 2023. This means that the purchasing power of the Jamaican dollar in addition to the real return on investments in the Jamaican economy will potentially be significantly eroded over the course of the year.

In efforts to combat this inflation, the BOJ is expected to continue increasing the policy interest rate in 2022, with the intended effect of generally slowing down economic growth and consumer demand to eventually reduce the inflation rate. Next week’s PROVEN Pulse will take a deeper dive into BOJ’s policy rate actions. Look out for next week’s PROVEN Pulse, where we will take a deeper dive into BOJ’s policy rate actions and how it affects you.