INFLATION in Jamaica has fallen sharply from its peak almost two years ago as energy prices retreated from record highs. Yet the battle to contain prices is not yet won, and the risks that inflation could spike again are increasing, according to Bank of Jamaica (BOJ) Governor Richard Byles.

Byles, speaking at the recently concluded Jamaica Stock Exchange 19th Regional Investments and Capital Markets Conference at the Jamaica Pegasus hotel in New Kingston, said that while gains have been made in reducing inflation, the battle is not yet won.

“Regrettably, the projections for this year are for inflation to be outside the target band of 4 per cent to 6 per cent for longer than we would like,” Byles told the audience.

He added that while core inflation, which strips away changes in the prices of food and oil from the headline inflation figure, “remains moderated”, and that the projected temporary uptick in overall price increases is expected to be driven almost entirely from local impulses, especially, higher taxifares and increased costs for agricultural produce.

That, as it is expected that declining grain prices and a lower-than-expected oil price, augur well for imported inflation to continue to be kept in check, and for a moderated longer-term inflation outlook in line with BOJ’s target.

Still, Byles points to an emerging risk to the inflation forecast without elaborating further.

“We are however keeping a keen eye on geopolitical events and the climate change impact on the Panama Canal which may cause supply chain challenges and higher shipping costs,” he said.

Those geopolitical events, it is presumed, constitute the wars in Europe and the Middle East, the latter which is threatening to become a regional conflict, as Iran-backed Houthi militants attack shipping through the Red Sea, while falling water levels in the Panama Canal slow shipping through the waterway, pushing up freight rates as shipping companies pay higher prices to jump the queue or sail the longer route all around South America.

But even before the surge in freight rates start feeding through to consumer prices, headline inflation ticked higher in December. It rose to 6.9 per cent last month, the highest it has been since February when it was recorded at 7.8 per cent. The move upwards highlight that getting inflation back down to 4 to 6 per cent — the rate targeted by the BOJ — may not be plain sailing.

And the central bank has indicated that itself.

In November, BOJ staff forecast that for the next two years, inflation will average 6.6 per cent, with price increases see-sawing around that level for much of 2024, and will only start decelerating within the target range in the March 2025 quarter.

Worrying for the BOJ, is that businesspeople, those who set prices for consumer goods, are also starting to expect higher inflation over the next 12 months. And that as the central bank governor, in response to
Jamaica Observer queries, indicates that the full effects of its tighter monetary policy, especially its policy rate of 7 per cent, have already fed through to the Jamaican economy.

“I would say that we see it in the capital markets and the money markets where rates have pretty much followed our policy rates up. We also see it in some of the commercial banks, maybe not so much on the deposit side, [but] we see it on their certificate of deposit side. So, to the extent that our transmission system works efficiently, I would say that the 7 per cent has worked itself through,” Byles said.

The combined forecast that inflation will remain higher for longer and that the interest rate hikes to contain it have already filtered through to the economy raised eyebrows as to what the next step will be to cauterise price increases for consumers who have had to endure with each dollar purchasing 25 per cent fewer products now than it could in September 2021.

But Byles was giving nothing away when asked which direction policies could take, in light of the available data and the forecast.

“It’s very hard to ask what is the decisions we are going to take down the road, because a lot depends upon what are the data and the information that we have at the time that we are making that decision. In the case of deciding whether we stay at 7 per cent, whether we tighten Jamaican dollar liquidity more or whether we remain assertive in the foreign exchange market, a lot depends on the data the MPC (monetary policy committee) is looking at on that date.”

That date for the next meeting of its rate setting MPC is schedule for February 16 and 19, and will come a day after the Statistical Institute of Jamaica is scheduled to release inflation data for January. By then, the BOJ will have two months of inflation data to analyse. How higher taxifares and agricultural prices continue to impact the economy then, will be keenly analysed, Byles indicated.

“To the extent that those [increases] back off, is to the extent that we will have a better outlook and a more moderate view on where interest rates will go and how tight liquidity will be,” he pointed out.