Inflation to peak in June
THE Bank of Jamaica says it expects inflation to peak in June before prices start to settle, leading to lower increases going forward.
Richard Byles, governor of the Bank of Jamaica, told journalists on Tuesday that “inflation is expected to peak at between 12 and 15 per cent by June” before levelling off and will only fall within the 4 per cent to 6 per cent target rate which the bank must maintain by June of next year. He said much of what will happen to inflation in Jamaica will depend on what happens to the prices of grains and oil over the next few months.
“The trend that we are advised is that those prices are likely to begin to retreat somewhat in the second half of the year… [Grain and oil price increases] constitute almost 75 per cent of the inflation that we experienced in April. So if those commodities start to retreat, we will begin to see a fall-off in inflation,” Byles added.
Inflation in April touched 11.8 per cent, capturing the highest point-to-point increase in prices since the 12 month period leading to September 2010.
“For oil prices we project them to average above $110,” Robert Stennety, deputy governor for research & economic programming division and financial stability at the BOJ, explained.
“This is in a sense a worst-case scenario that we are building into these forecasts… This is for WTI for the June quarter which is about a 19.5 per cent increase quarter over quarter. That level of oil prices we expect to continue for the September quarter,” Stennett continued. The WTI being referred to is the West Texas Intermediate price of a barrel of oil and is the most frequently quoted oil price in Jamaica.
Stennett said the high price that has been forecast for oil between April and June reflects expectations that as the world economy continues to recover, demand will continue to outpace supply, especially with the conflict in Europe largely stymieing supplies from Russia as a result of sanctions. While the Russian oil sector has not been directly targeted for sanctions, it is coming under increased pressure. The United States banned Russian oil imports in March, and the European Union hopes to announce a similar measure soon. The Group of Seven industrialised nations, which include Britain, Japan and Canada, agreed this month to gradually phase out Russian oil imports.
“The fact that OPEC has not volunteered to allow more oil to flow is also a contributor to this level of oil prices that we are projecting,” Stennett outlined.
“We assume that moderate downward pressures will start to emerge after September because these oil prices are likely to generate a supply response particularly from US shale. And so overall, as prices normalise post-September, we expect average oil prices in the range of $100 to $110 per barrel for fiscal year 2022/23 which our forecast overall feels is about 40 per cent higher than the previous year.”
Stennett said the price of grains is a little more uncertain. “They are projected to increase, also from now until September, in the context of continued demand as well as continued constraints to supply conditions coming out of Ukraine and Russia. As we know, those two countries account for between 30 to 40 per cent of global grain supplies and so the conflict, as long as it continues, is going to continue to present upward pressure to these prices.”
“The upshot of all of this is that domestic inflation is likely to reach a peak of between 12 per cent to 15 per cent in June and thereafter it will start to decline. So we expect inflation; if grain and oil prices follow the path we just described, we expect inflation to go below 10 per cent by the early part of 2023.”
Stennett explained further that the heavy price increases that were recorded over the last few months should not materialise in 22/23. In fact, he said while prices rose on average by 0.9 per cent each month during the 2021/22 fiscal year, the month-over-month increase after June should be smaller, although he didn’t offer a figure. If inflation is to fall within the 4 per cent to 6 per cent range that the Bank of Jamaica should attain each year, prices will have to rise in a range of 0.33 per cent to 0.5 per cent each month.