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Wayne-Robinson“Impact of Rising International Commodity Prices. What Can BOJ Do?”
by Senior Deputy Governor Wayne Robinson, July 2021

Rising prices a concern…

All of us, workers, householders, business owners (whether a factory, store or stall) and policy makers are concerned about the recent rise in the costs of food, transportation and utilities. This rise in prices is a global phenomenon due to rapid increases in important commodities on the international markets, such as fuel, wheat, corn, soybean, steel, lumber and shipping costs.

Manufacturers, distributers and retailers have to figure out how much of these rising costs they can actually pass on to their customers and when. STATIN’s monthly Producer’s Price Index (PPI) shows that as at May 2021, the factory prices for goods produced by the manufacturing sector increased by close to 13% overall, relative to a year earlier. Meat & Meat Products was up 10.7%, Grain Mill Products 10.6%, Wood Products & Furniture 28% and Refined Petroleum Products up by 44% over last year.

We are seeing the effects on retail prices. Inflation at June 2021, measured by the annual change in the Consumer Price Index (CPI), was 4.3%. Although the inflation was within Bank of Jamaica’s target band of 4.0% to 6.0%, June’s outturn reflected fairly strong changes in the prices of a number of processed food groups, including: Cereal and Cereal Products (includes items such as flour, rice and baked products), up 9.7%, Meat up 10.5%, Fish & Seafood up 7.3%, Milk, Dairy Products & Eggs up 6.5% and Oil & Fats (includes items such as cooking oil, butter and margarine) which was up 7.6% over the last 12 months. The impact of these changes on overall inflation was partly offset by declines in vegetable prices, water and sewage rates.  

But while there is cause for concern there is hope…

As the Bank communicated recently, and as explained in the minutes that are published on Bank of Jamaica’s website, the five-member Monetary Policy Committee (MPC) of the Bank, is of the view that the recent inflationary pressures are temporary. This as, the recent upward trends in imported prices are due to supply bottlenecks and adverse weather in the context of the quick pace at which consumer demand is bouncing back. We expect that, over the course of the next six months supply will eventually respond. (Recall also that these prices fell significantly in 2020, as the COVID-19 pandemic grew.)

The pace of price increases should therefore slow and we could even see some stabilization or a reduction in these imported prices. In fact, there are nascent signs of this. Corn prices, for example, have fallen by 4.4% between May and June, while soybean prices fell by 2.6% over this same period. Lumber prices have fallen more sharply by 31.4% between May and June this year. The downward trend in these commodity prices has continued into July. At 20 July 2021, corn, soybean and lumber prices declined by 9.0%, 4.4% and 35.5%, respectively, relative to the average price for June 2021.

The Bank’s current central forecast for inflation, which incorporates these increases in imported commodity prices, is within the 4% to 6% band but closer to the upper end of the range.  We acknowledge that there is a risk that inflation could exceed the upper end of the band but, for the reason noted above, we believe that even if this happens, inflation will eventually subside to the target range.  

What will Bank of Jamaica do…

The Government of Jamaica has mandated Bank of Jamaica to keep the rate of increase in the general price level over a 12-month period in the range 4% to 6%. The amended Bank of Jamaica Act also created the MPC, comprised of the Governor (Chairman), Senior Deputy Governor, Deputy Governor in charge of the Bank’s economics division and two noted external appointees in Mr. David Marston (former senior executive of the IMF) and Dr. Nadine McCloud (head of the Economics Department at UWI, Mona). This committee is responsible for taking decisions on interest rates to achieve the target.  The Committee’s work is supported by a team of highly trained economists with various specialisations in economics and who, among other things, regularly consults with producers and retailers.

Against this background, the first thing to take note of is that given our assessment that the inflationary pressures will be temporary, the MPC believes that the current stance of monetary policy is appropriate. Consequently, at the conclusion of our meetings on Friday, 28 June 2021 and Tuesday, 29 June 2021, it voted unanimously to keep the policy rate at the historic low of 0.50%.

We will continue to monitor developments in the commodities market and will update our inflation forecast to incorporate changes as they materialise. We will communicate any change in the outlook to the public.

Bank of Jamaica will also continue to monitor how exchange rate movements are impacting domestic prices and ensure that the movements are orderly and also do not threaten the inflation target. We have seen a lower impact when compared to the almost one-for-one impact within a year that was observed in the past. While the exchange rate moves in repeated depreciation and appreciation cycles, so far this year the movements are not very different from last year. July is not yet finished but for the first half of 2021 the exchange rate depreciated by 4.1% which was a slower pace of depreciation relative to the 5.6% recorded for the same period last year.

The MPC will again on, 17 August and 18 August, pour over emerging data, analyses and updated projections to determine an appropriate action. If at that point it is clear that:

So stay tuned, and on 19 August, the MPC will communicate its views and the monetary policy decision.

Keep safe, social distance and wear yuh mask!


Dr. Wayne Robinson is the Senior Deputy Governor and former Head of Research at BOJ. Editor’s note: this article was published in the Jamaica Gleaner: https://bit.ly/3EbBqoe

Post Author: Editorial Team