Inflation knocking on TT’s door

Trinidad and Tobago might be enjoying good economic times, but rising inflation could put a spoke in the growth wheel. According to the Central Bank Governor Ewart Williams, rising inflation rates could become a self-fulfilling prophecy. “More and more people are beginning to feel that inflation is increasing,” he said, noting that once this happens it takes on a life of its own. In its Monetary Policy report, food prices increased by 25.6 percent year-on-year, the highest increase in any 12 month period since 1989. Moreover, the steady rise in food price has continued in the first quarter of 2005.

At a press conference at Central Bank this week, Williams sought to quell fears that inflation was slipping out of control. He said his main fear was the rising price of food but warned that this could have a ripple effect on other sectors of the economy. He also poured cold water on the suggestion to use interest rates to control high food and vegetable prices. “The injudicious use of interest rates can be self-defeating,” he said. In the 12-month period ended March 2005, headline inflation amounted to 7.3 percent, compared with 2.8 percent in the corresponding period of a year earlier. Headline inflation measures the overall change in the All-Items Index.

Meanwhile, Core inflation measured 2.8 percent in the 12 month period to March 2005, representing a pick-up since year-end when the core inflation rate was two percent. Core inflation excludes the volatile food component and reflects the underlying inflationary environment in the economy. For the period January-March 2005, the prices of fruits and vegetables which have a significant weight in the consumer’s food basket, increased by 12.5 percent and 14.8 percent, respectively compared to the corresponding period of 2004, said the Central Bank in its Monetary Policy report to April 2005. In the first quarter of 2004, headline inflation remained relatively subdued increasing on an average monthly basis by 0.1 percent.

After remaining fairly well-contained for the first three quarters, headline inflation started to rise more sharply in the last quarter of that year, said the Central Bank. Monthly inflation rates continued to increase during the course of the year, picking up more significantly during the last quarter of 2004, “when the average monthly rate increased by 0.7 percent.” This trend in average monthly headlined inflation has continued during the first quarter of 2005, noted the bank. This, the bank said, was largely due to an increase in food prices partly related to agricultural food shortages linked to inclement weather and flooding. Among the factors contributing to the rise in food prices during 2004, the bank said were:

(i) The depreciation of the TT dollar against the pound sterling and the Euro which raised the prices of dairy products imported from these markets

(ii) A more general rise in commodity import prices relating to increasing demand from fast growing China. “The Central Bank must stand ready to tighten monetary conditions as needed to contain core inflation and address the inflation risk,” said the bank in its report.