Port-of-Spain, Trinidad -- Feb. 26, 2008 -- The latest data released by the Central Statistical Office show that headline inflation, which had been trending downward for most of 2007, picked up momentum, rising to 10 per cent on a year-on-year basis to January 2008 from 7.6 per cent in December 2007. On a monthly basis, headline inflation measured 2.1 per cent in January 2008, the highest monthly increase since 2003. The current inflation spike was spurred mainly by increases in food prices but core inflation has also risen appreciably.

Food price inflation, which has been the main catalyst of headline inflation, registered an increase of 20.8 per cent in the twelve months to January 2008, compared with 16.8 per cent in December 2007. Comparing the twelve-month increases ending January 2008 with those of December 2007: the prices of bread and cereals rose by 14.1 per cent (compared with 10.4 per cent); milk, cheese and eggs prices rose by 28.4 per cent (compared with 27.1
per cent); meat prices rose by 13.7 per cent (compared with 12.1 per cent); the price of fish rose by 17.2 per cent (compared with 16.9 per cent); the price of fruits rose by 34.8 per cent (compared with 28.9 per cent); and vegetable prices rose by 30.2 per cent (compared with 22.0 per cent) (See Appendix Table 1).

The upward movement in the food prices sub-index is reflected in price increases in a number of basic food items. For instance, the price of cheese rose to $56.00 per kilogram in January 2008 from $47.50 in December 2007; the price of eggs (market) rose to $18.00 per dozen in January 2008 from $14.00 in December 2007 while the price of carnation evaporated milk (250 ml) rose to $5.25 in January 2008 from $5.00 in December 2007.

As regards agricultural commodities, information obtained from NAMDEVCO also show significant price increases in January 2008 over a range of food items (See Appendix Table 2).

Core inflation, which excludes the volatile food price component, rose in January 2008 to 5.7 per cent on a year-on-year basis from 3.9 per cent in December 2007. This represents the highest monthly increase in the core rate of inflation since this indicator was established in 2003. Comparing the year-on-year increases in January 2008, with those of December 2007, the sub-index
for recreation and culture increased by 14.1 per cent (compared with a decline of 1 per cent), alcoholic beverages and tobacco rose by 13.8 per cent (compared with 12.9 per cent), health services rose by 6.8 per cent (compared with 4.8 per cent) and the transport sub-index rose by 4.0 per cent (compared with 3.2 per cent). In the case of recreation and culture, the increase reflected a rise in airfares while the health sub-index was impacted by an increase of 13.4 per cent in doctors’ fees.

The latest inflation data confirm that Trinidad and Tobago continues to face the systemic consequences associated with high oil prices and a booming economy. The challenges are, however, being aggravated by both global and domestic food price shocks. The underlying inflationary conditions are the result of continued high net fiscal injections and rapid bank credit expansion, in an environment of declining spare capacity. Net fiscal injections in the
first four months of FY 2008 were 10 per cent higher than in the corresponding period of the last fiscal year and 40 per cent higher than in the same period of FY 2006. At the same time, the latest data show bank credit expanding by close to 22 per cent in 2007. Consumer credit has been expanding at close to the same rate.

The Bank has implemented a number of liquidity absoption measures, including openmarket operations, to dampen the consequential increase in money demand. Increased salesof foreign exchange have also assisted with liquidity absorption. While these measures have had some success, inflationary pressures, resulting from limited agricultural supplies and
higher global food prices, have intensified.

In light of the larger than expected jump in inflation, and to dampen any increase in inflationary expectations, the Bank has decided to further tighten monetary measures as follows:
(i) The ‘Repo’ rate, which has been kept unchanged for the past 17 months, has been increased by 25 basis points from 8.00 per cent to 8.25 per cent.
(ii) The cash reserve requirement applicable to commercial banks has been increased from 11 per cent to 13 per cent of prescribed liabilities. The cash reserve requirement on nonbanks has been kept at 9 per cent of prescribed liabilities, for the time being.
The Bank will continue to intensify open market operations through sales of Government securities of varying maturities.
The next ‘Repo’ rate announcement is scheduled for March 28, 2008.
February 22, 2008.