March 2016 Research Services...

Short term Inflation Analyses and Forecasts

March 2016 Research Services Department

Foreword This report reviews recent trends in inflation and presents the outlook for the remainder of the fiscal year. The analysis is based on trends in short-term domestic demand and supply indicators as well as imported inflation. These factors inform the assumptions for the short-term inflation forecasting model – Monthly Inflation Sub-Index Model (MISI).

Table of Contents

1.0 Review of Outturn 1

2.0 Factors underpinning the revised forecast 3

2.1 Trends in demand 3 2.2 Trends in supply 4 2.3 Import prices 5 2.4 Trends in Core Inflation 6

3.0 Revised Forecast 7

4.0 Summary and Conclusion 9

Appendices 10

Tables and figures Figure 1: Trend in monthly inflation 1

Figure 2: Regional Inflation 1

Figure 3: Inflation Contribution 2

Figure 4: Short-term Indicators of Demand 3

Figure 5: Industrial Electricity Sales 4

Figure 6: International Commodity Prices 5

Figure 7: Core Inflation (12-month change) 6

Figure 8: Monthly Inflation Fan Chart 8

Figure 9: Trends in selected agriculture production 10


March 2016 Research Services Department 1

1.0 Review of Outturn For March 2016, there was deflation of 0.1 per cent, compared to inflation of 0.5 per cent for March 2015. This contrasts with average inflation of 0.7 per cent for March of the last five years. Given the March 2016 outturn, annual point-to-point inflation was 3.0 per cent, below the 4.0 per cent as at March 2015 and below the 3.6 per cent as at February 2016. Figure 1: Trend in monthly inflation

Deflation for March 2016 was recorded in all three regions with the largest average decline in prices occuring in the Greater Kingston Metropolitan Area (GKMA). The GKMA region recorded the largest level of declines in regards to Food and Non-Alcoholic Beverages (FNB), relative to the other two regions. The decline in FNB was attributed to increased supplies of vegetables and ground provisions as produce such as yam, sweet potato, pumpkin, cabbage and carrot saw a reduction in their prices. This was partly offset by an increase in Miscellaneous Goods and Servies (Misc) relative to the other regions due to an increase in the National Minimum Wage as well as higher costs of personal care products and appliances. Figure 2: Regional Inflation

The outturn for March 2016 was below the average for the last 5 years.



Deflation in March 2016 was primarily driven by declines in FNB, TRAN and HWEG. The reduction in FNB largely reflected lower prices for domestic agricultural commodities as produce such as yam, sweet potato, pumpkin, cabbage and carrot saw a reduction in their prices. The decline in TRAN and HWEG was attributed to the reduction in the costs for air travel and petrol as well as a fall in the rates for water and sewage. Figure 3: Inflation Contribution

Deflation for March 2016 primarily reflected declines in the cost of unprocessed food, rates for water and electricity as well as air travel and petrol rates.

Blue bars = positive and Red bars = negative MIS= Miscellaneous Goods & Services, R&A=Restaurants & Accommodation Services, ED=Education, R&C=Recreation & Culture, COM=Communication, TRAN= Transport, HLTH=Health, FHERM=Furnishings, Household Equipment & Routine Household Maintenance, HWEG=Housing, Water, Electricity, Gas & Other Fuels, C&F=Clothing & Footwear, ABT=Alcoholic Beverages & Tobacco, FNB=Food & Non-Alcoholic Beverages Source: STATIN



2.0 Factors underpinning the revised forecast

2.1 Trends in demand Two of the three major indicators of domestic demand monitored by the BOJ increased for the review period. For the three months ended February 2016, the 12-month average of the real value of debit and credit card transactions and PAYE increased by 4.2 per cent and 1.8 per cent, respectively. The real value of imports declined by 2.0 per cent (see Figure 5). Figure 4: Short-term Indicators of Demand

Two of the three indicators of domestic demand monitored by the BOJ increased.



2.2 Trends in supply For March 2016, data garnered from RADA indicated that the supplies of starchy foods and vegetables were increasing. In this respect, the prices of these commodities declined relative to the previous month. RADA’s projection for April 2016 suggests that the supply of both starches and vegetables were largely unchanged relative to the previous month. The survey carried out by the Ministry of Agriculture & Fisheries (MOA) suggests a marginal decline in agricultural commodity prices in April 2016. Similarly, information received from the Consumer Affairs Commission’s (CAC) price survey also suggests a decline in domestic agricultural commodity prices during the month, particularly in the RUA region. Information from RADA suggests that supplies of vegetables and starchy food are largely projected to be largely unchanged in May 2016. The 12-month average trend in industrial electricity sales, used as a proxy for industrial production decelerated in March 2016 relative to the same measure three months prior (see Figure 6). Figure 5: Industrial Electricity Sales

There was a decline in domestic agriculture commodity prices in March 2016 relative to the previous month. The indicator of industrial productivity decelerated in March 2016.



2.3 Import prices For March 2016, the average price of crude oil increased by 23.99 per cent to US$37.96 per barrel (bbl.) relative to the previous month. This increase was largely influenced by: (1) the International Energy Agency’s monthly report which highlighted the possibility that oil prices had “bottomed-out”; (2) news that the Government of China would increase fiscal stimulus measures in order to meet its 6.5 per cent to 7.0 per cent economic growth target, and (3) improved labour market conditions in the USA. For April 2016 to date, the average price of crude oil increased by 5.7 per cent to US$40.1 per barrel (bbl.) relative to the previous month. This price increase occurred in the context of renewed investor confidence of higher oil prices ahead of the 17 April 2016 oil producer meeting in Doha to discuss a production freeze. Additional upward price pressures emanated from (a) the Energy Information Administration’s downward revision to its forecast for US crude oil production from 8.67 million bbls. per day to 8.6 million bbls. per day. Figure 6: International Commodity Prices

Oil prices rose in March and are expected to increase in April 2016.



For March 2016, the grains price index increases by 0.5 per cent. This increase primarily reflects a rise of 4.1 per cent and 3.5 per cent, respectively in the prices of wheat and corn. The increase in price was partly offset by a decline in the price of rice. For April 2016, the grains price index increased by 1.7 per cent. This increase primarily reflects a rise of 3.3 per cent and 2.9 per cent, respectively in the prices of rice and corn. This increase was partly offset by a decline in the price of wheat.

2.4 Trends in Core Inflation For March 2016, the monthly measure of CPI without Food and Fuel (CPI-FF) and CPI without Agriculture and Fuel (CPI-AF) both accelerated by 0.3 per cent relative to increases of 0.1 per cent and 0.2 per cent, respectively in the previous month. The Trimmed Mean (TRIM) declined by 0.1 per cent from a decline of 0.2 per cent in the previous month. At end-March 2016, two of the three annual point-to-point measures of core inflation all decelerated. CPI-AF and TRIM all decelerated to 3.0 per cent and 2.7 per cent compared to 3.1 per cent and 2.8 per cent in February 2016 (see Figure 7). CPI-FF was unchanged at 3.1 per cent compared to the previous month Of note, there has been a trend deceleration in annual core inflation since August 2014. Figure 7: Core Inflation (12-month change)

The grains prices index increased in March and April 2016. Two of the three measures of annual core inflation decelerated for March 2016 relative to the previous month.



3.0 Revised Forecast

For April 2016, downward pressure for the month is expected to primarily originate from continued declines in non-processed food prices and HWEG. This decline is expected to be partly offset by an increase in TRAN. Additionally, it is expected that there will be an increase in processed food prices due to the lagged impact of seasonal Easter demand. For May 2016 inflation should primarily reflect an increase in HWEG and TRAN due to increases in oil and petrol prices. Upward pressure should be partly offset by a decline in non-processed food prices. For June, inflation is projected to be 0.3 per cent. Inflation for this month should largely result from an increase in HWEG due to higher oil prices. This increase is likely to be partly offset by a decline in TRAN and non-processed foods.

Inflation for FY2016/17 is projected to fall within the target range of 4.5 per cent to 6.5 per cent. The overall risks are perceived to be balanced for the next four quarters (see Figure 8). The major downside risks include the possibility of a larger than anticipated reversal in raw food prices, lower than projected international commodity prices, better than anticipated impact of developments in the Agro-parks on domestic agriculture supply and weaker than expected demand conditions. The main upside risks to the inflation forecast are higher than anticipated exchange rate depreciation and pass through due to uncertainty associated with the fiscal budget, stronger than anticipated growth in monetary aggregates, worse than anticipated weather conditions, higher than anticipated international grain and oil prices and stronger than anticipated domestic demand conditions.

Headline inflation for FY2016/17 is anticipated to be below the within the target range of 4.5 per cent to 6.5 per cent.



Figure 8: Monthly Inflation Fan Chart



4.0 Summary and Conclusion For March 2016, there was deflation of 0.1 per cent which was primarily driven by declines in FNB, TRAN and HWEG. The reduction in FNB largely reflected lower prices for domestic agricultural commodities as produce such as yam, sweet potato, pumpkin, cabbage and carrot saw a reduction in their prices. The decline in TRAN and HWEG attributed to the reduction in the costs for air travel and petrol as well as a fall in the rates for water and sewage. For April 2016, downward pressure for the month is expected to primarily originate from continued declines in non-processed food prices and HWEG. This decline is expected to be partly offset by an increase in TRAN. Additionally, it is expected that there will be an increase in processed food prices due to the lagged impact of seasonal Easter demand. For May 2016, inflationary impulses should primarily reflect an increase in HWEG and TRAN due to increases in oil and petrol prices. Upward pressure should be partly offset by a decline in non-processed food prices. Inflation in June should largely result from an increase in HWEG due to higher oil prices. This increase is likely to be partly offset by a decline in TRAN and non-processed foods. Inflation for fiscal year 2016/17 is projected to be within the target range of 4.5 per cent to 6.5 per cent.



Appendices Figure 9: Trends in selected agriculture production

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