Byron Blake | Absurdity! Overshooting target inflation rate should be welcomed
Recent pronouncements and the panic surrounding Jamaica overshooting its “target” inflation rate is, frankly, absurd.
Overshooting here, which means moving closer to zero, should be welcomed.
Most countries, in particular, import and export dependent countries, for different reasons, have strong interest in low inflation. In the case of high import-dependent countries, low inflation implies that their consumers and producers are spared the burden of the inflation of the exporting country. This should be positive for the cost of living and for the cost of production.
For export-dependent countries, the low inflation translates to lower cost for both its imported and domestic inputs, including wages. Other things remaining constant, its potential exports should be more competitive in export markets.
Jamaica is a very highly import dependent and “aspiring” export economy. It should, therefore, have a double interest in low inflation. But there are two other reasons Jamaica should be interested in low inflation, especially at this time.
First, the Government has a very large wage bill. It has been pleading with its employees for almost a decade to hold strain in their wage demands. Negotiations have become increasingly difficult, as public sector workers contend that they face increasing inflationary pressures.
A low inflation with prospects of it going even lower would be one of the strongest counter arguments that the Government can rationally advance in those negotiations, which not only impact adversely the Budget but the entire industrial environment.
Second, Jamaica has had chronic inflation and low growth for decades. These are now baked into the psychic. A short period of downward movement, especially with clear statement that public policy favours a level of inflation above that of most of major trading partners, is unlikely to change that mental attitude.
NO REASON FOR IT
In the circumstances outlined, we are unable to discern one reason Jamaica’s policy makers would wish to keep inflation above any arbitrary level.
In the event the policymakers are able to find a reason, what policy actions do they propose to use to correct the mischief?
The main reasons for the fall in inflation in the last two quarters are lower domestic agricultural prices and lower imported energy prices. If those are the primary drivers and with imported fuel costs projected to fall even more with the movement to natural gas, what policy action can the Government take to reverse the falling inflation?
Can it legislate that farmers withhold from the market the increased production from a good weather driven season?
Will it instruct Petrojam not to purchase fuels at prevailing world prices if they continue to fall?
Could it put an additional tax on imported fuel products?
Taxes on fuel products in Jamaica are already among the highest in the world. We do not see the policy options available to Government to reverse the impact of falling prices arising from changes in weather patterns or the international fuel market.
A country which has suffered from the adverse impact of high inflation for so many years deserves a greater explanation as to why it should not benefit fully from any reduction.