April 2008 Report - Central Bank of Trinidad and Tobago

CENTRAL BANK OF TRINIDAD AND TOBAGO MONETARY POLICY REPORT APRIL 2008
Chart 1
Index of Retail Prices
(year-on-year per cent change)
Available indicators suggest a continuation of the growth
momentum in 2008 as activity in the energy sector is expected
to recover while government and private spending continue to
drive the non-energy economy.
In these circumstances, domestic inflationary pressures
have remained strong and have been further compounded by
the substantial increases in international food prices.
After peaking at 10 per cent in October 2006, headline
inflation in Trinidad and Tobago, as measured by the 12-month
change in the Index of Retail Prices, declined gradually to 7.3
per cent by October 2007 on the strength of tighter monetary
policies, a one-time reduction in tariffs and taxes on a range of
food items and a series of government interventions geared to
establishing more competitive markets for certain agricultural
products. The steady decline was reversed in December 2007,
and headline inflation returned to 10 per cent in January 2008.
The rate stood at 9.4 per cent in February 2008 (Chart 1).
The latest pickup in inflation has been led by a surge in
food prices which rose, on a year-on-year basis, from 16.6 per
cent in October 2007 to 20.4 per cent in January 2008. However,
core inflation, which filters out food prices, has also increased
substantially over the past six months, from 4.5 per cent (year on
year) in August 2007 to 5.7 per cent in January 2008.
Food prices have always been the main driver of inflation
in Trinidad and Tobago. However, from an average annual rate
of 12.9 per cent in the decade of the 1990s, the annual increase
in food prices reached as high as 27 per cent in September 2006
and is currently at a rate of 20 per cent in early 2008.
Core inflation averaged 3.2 per cent a year at the
beginning of the decade (2000-2002). The near doubling
since that period is a good indication of the underlying
inflation pressures that have faced the economy over the
last few years.
Demand pressures resulting from robust economic
growth, pro-cyclical fiscal policies and rapid credit expansion lie
at the root of Trinidad and Tobago’s inflation problem. Capacity
constraints and supply bottlenecks, particularly in the agricultural
sector, combined with the recent escalation in imported food
prices have significantly added to these demand pressures.
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