Economy Update: Why Is Inflation At A Record Low?

Click to enlarge. Chart showing monthly inflation for the periods July 2013-2014 (blue) and July 2014-2015 (red). Source: STATIN

BOJ Governor, Brian Wynter, announced that the 12 month period ending July 2015 showed inflation at 3.8 percent, a 43 year low. What led to such comparatively low levels of inflation? Let’s take a deeper look into the movement of the inflation rate for this period.

Interestingly, as seen on the graph above, during this period there were 4 consecutive months of deflation. That is, from November 2014 to February 2015, Jamaica experienced a general reduction in prices levels.

This period of deflation was likely due to the decline in petrol prices in the second half of 2014. Oil prices and inflation are closely linked, as oil is a critical factor in many processes of the economy. As explained by PetroJam, the price of petrol in Jamaica usually correlates with the US Gulf Coast (USGC) Reference Price. The USGC Reference Price began to see decline in July 2014 and continued to fall through December. Though the index price increased in January and February of 2015, it was still much lower than the reference price prior to the beginning of the decline.

The deflation period ended in March 2015. In part, the end of the deflation was perhaps owing to the announcement of a $7/litre petrol tax implemented on March 18. Inflation declined in April, only to see increases in May, June and July, as the effect of 2015’s drought started to be felt, especially in the agriculture industry. Despite these changes, inflation has continued to be relatively low due to the persistent effect of lower oil prices.

Wynter has projected that inflation will stay within the BOJ’s projected 5.5% to 7.5% range for 2015. Monitor the movement of key economic factors affecting this projection here on diGJamaica through our economic dashboard.