Morrison

IF WE are lucky, and the signs seem to favour us, the 2009 hurricane season could pass without our farmers taking another battering. Also, the drought that was threatening has been relieved before doing severe damage to crops enough to cause spikes in food prices, except in a few cases. The prices for onions and Irish potatoes, which on August 15 were $160 and $140 per pound, respectively, at Coronation Market, were clearly exceptional, reflecting shortages, while lettuce at $150 per pound must be due to seasonal spike. By and large, the prices of most other items did not change significantly over the last two to three months and were comparable with the same period last year.

It is partly because of this relative stability in the prices of domestic food crops that the inflation rate that was projected by the Bank of Jamaica at 11-14 per cent for 2009 is running significantly lower. The good news is that for the first seven months of this year, the rate was five per cent. This is a far cry from the high of 13.9 per cent for the same period last year when a combination of devaluation, rising domestic food prices after Tropical Storm Gustav, and high imported food prices pushed up the cost of living.

inflation pressure off

As the Jamaican dollar has settled down with the stabilisation of the foreign-exchange market in recent months, and world food and energy prices have declined, the island has joined the rest of the Caribbean in experiencing a lessening of inflation pressures. In Trinidad and Tobago, where inflation reached nearly 15 per cent last year as food prices rose by over 30 per cent, there has been a marked deceleration in price increases, with the annual rate now running at 8.4 per cent as at June 2009. Barbados has also seen its inflation rate decrease from a peak of 11.2 per cent for the year ending September 2008, to an annualised rate of 3.8 per cent as at April 2009.

The lowering of inflation in Jamaica and a more stable foreign-exchange market now make it possible for local interest rates to be reduced. Thus, in the last month, the Bank of Jamaica chopped policy interest rates by 3.5 percentage points. This partly reverses the hike in rates late last year and earlier this year when pressures on the Jamaican dollar forced the bank to take action to defend the currency. The reduction in the rates will relieve some of the interest costs to the national budget, which is critical in the effort to contain the fiscal deficit and hold down government borrowings.

Likewise, if the commercial banks were to pass on the rate reductions to their customers, that would ease the pressure on businesses and the general public at a time of severe economic stress. But the track record of the banks on this is not good. They have consistently been slow to drop their lending rates when the central bank reduces the policy rates and relaxes reserve requirements, but quick to raise rates when the movement is in the opposite direction. This is an issue that has been raised in previous attempts at forging a tripartite social partnership, but has been resisted by private-sector leaders who, nonetheless, demand wage restraint by workers.

expectations

In the United States (US), inflation was running at an annual rate below two per cent up to July, less than half the rate for the corresponding period of last year. This is the result of reduced energy prices, weak demand, and pressure to cut prices in order to boost consumer purchases. Businesses have been forced to implement cost-cutting measures as they struggle to improve their finances, and with rising unemployment, wages are being squeezed. Economists are predicting that US inflation will remain at this subdued level for the next 18-24 months as the recovery of demand will be slow and cost pressures will be contained by anaemic economic growth. They expect a similar picture to obtain in the other advanced countries.

For Jamaica, this could mean that imported inflation will remain low. With low imported inflation and increasing domestic food production, the authorities should be able to keep Jamaican inflation rates under control. In a situation where public-sector wages have been frozen and wages generally will be under pressure over the next two to three years, this is an essential step towards containing the erosion of living standards of the most vulnerable groups. Private-sector entities can contribute by exercising restraint in their pricing policies in the same way that workers are being asked to hold strain.

key private-sector players

While there are encouraging signs that cooperation by key private-sector players in moderating demand pressures on the foreign-exchange market has helped to keep the exchange rate from sliding, it must be recognised that, essentially, exchange-rate stability is being achieved by way of the contraction in economic activity. Measures to raise the capacity to earn foreign exchange, or to reduce imports, such as food, which should be accelerated in this downturn, are the more sustainable means of ensuring currency stability. This, in itself, is a critical component of the drive to control inflation in Jamaica.

Dennis E. Morrison is an economist. Feedback may be sent to columns@gleanerjm.com.