Inflation rate hits new high

Published: Wednesday October 1, 2008

The latest information released by the Central Statistical Office indicate that headline inflation, measured by the twelve month increase in the Index of Retail Prices rose to 13.5 per cent in August 2008 from 11.9 per cent in the previous month.

Food inflation exerted the largest influence on the headline inflation rate registering a year-on-year increase in August of 30.2 per cent up from 25.3 per cent in July. On a monthly basis, food prices increased by 5.6 per cent - the largest monthly increase since December 2000. The sharp jump in food inflation reflected significant increases in the prices of bread and cereal (62.6 per cent compared with 60.3 per cent last month), meat (16.5 per cent compared with 11 per cent) and vegetables (38 per cent compared with 23.1 per cent).

Recent floods and adverse weather conditions have affected vegetable production and have contributed, in part, to the escalation in vegetable prices. On a year-on-year basis to August, there have been significant increases in the prices of tomatoes (77 per cent), melongene (149 per cent), cucumber (147.8 per cent), green pigeon peas (111.3 per cent) and bodi (109.3 per cent).

Core inflation, which filters out the impact of food prices, edged up slightly increasing by 6.3 per cent in the twelve months to August compared to 6.2 per cent in the previous month. The sub-indices for alcoholic beverages, health services and clothing and footwear posted increases of 16.2 per cent, 6.3 per cent and 3.0 per cent, respectively. The high level of core inflation underscores the strength of underlying inflationary pressures.

Net domestic fiscal injections in the eleven months through August 2008 were 16 per cent higher than in the corresponding period of the previous year. Since the beginning of the fiscal year, to offset these injections, the Bank has raised the cash reserve requirement applicable to commercial banks from 11 per cent to 15 per cent and has increased net sales of open market bills to $7480 million - 149 per cent higher than in the corresponding period of the previous fiscal year. In addition, sales of foreign exchange also assisted in withdrawing $5058 million in excess liquidity from the system.

Private sector credit by the consolidated system, which has been rising on average by 18 per cent (year-on-year) in the first nine months of the fiscal year, slowed to 12.4 per cent on a year-on-year basis in July 2008. Consumer credit also slowed to 13.1 per cent in July from around 19 per cent (year-on-year) during the first half of 2008.

Inflation risks will remain on the upside in the coming months, especially in an environment of heightened inflationary expectations, high global food and energy prices, supply-side bottlenecks in the domestic economy and mounting pressures for higher wage settlements. The 2009 budget package, which provides for an increase in government expenditure, is likely to further boost liquidity in the financial system.

Inflation reduction will continue to be a main objective of government policy. An increase in agricultural output is expected to make a contribution to containing food inflation. However, recent flooding in some major agricultural areas and delays in the implementation of certain agricultural projects may postpone a meaningful supply response for several months. In these circumstances, even greater reliance must be placed on demand management policies - fiscal and monetary. The recent issue of the TT$700 million Housing Development Corporation (HDC) bond, which was oversubscribed, will assist in liquidity absorption and help to contain demand pressures. The Bank is also finalising arrangements with the Government for the issuance of another liquidity absorption bond in the upcoming weeks. The Bank stands ready to take other monetary measures as circumstances warrant.

Against the background of persistent inflationary pressures, the Bank has decided to raise the "Repo" rate by 25 basis points to 8.75 per cent with effect from September 26, 2008.

The Bank will continue to keep economic and monetary conditions under close review.

/Central Bank of Trinidad and Tobago


Source: Trinidad Express Newspapers
http://www.trinidadexpress.com/index.pl/article_business_mag?id=161382153