the goldilocks inflation target - bank of jamaica · boj committed to predictable, stable and low...

The Goldilocks Inflation Target

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Demystifying inflation

What is inflation?

How is inflation measured?

What does inflation mean for you?

Benefits of low and stable inflation

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Inflation occurs when there are increases in the prices of goods and services over a period of time.

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What is Inflation ?

Recent trends in inflation

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Inflation is measured using the Consumer Price Index (CPI) compiled monthly by STATIN.

The CPI records the prices of the goods and services purchased by consumers in Jamaica.

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How is inflation measured?

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How is inflation measured?

Prices of 480 commodities are collected, representing the ‘basket’ of goods and services that the average Jamaican household consumes.

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These goods and services

are grouped into 12

divisions, each having

representative weights.

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CPI also calculated for three

regions of Jamaica:

1. Kingston Metropolitan Area

2. Other Major Towns

3. Rural Areas.

How is inflation measured?

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Inflation & You

1. Low inflation still means that prices are going up, albeit at a slow rate.

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Inflation & You

2. CPI measures the ‘average’ price of a selected set of goods and services by a selected group of Jamaicans in a certain income range.

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Inflation & You

3. In any given month, the prices of some of the items in the CPI may go up, while the prices of others may go down.

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The effect of high inflation?

High, pervasive inflation has ruined the lives of hundreds of thousands of Jamaicans and has devastated many businesses.

High

Debt

High

Inflation

High

Interest

Rates

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So why not target zero inflation?

• So if inflation is such a bad thing, so why not target zero inflation?

• There is the problem that the economy might slip into a recession where there are falling prices - deflation.

• Decrease in pricing means less production & wages will fall, which in turn causes prices to fall further causing further decreases in wages, and so on. In the case where wages are fixed then layoff and closure of businesses may occur.

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So why not target zero inflation?

The optimal value of the inflation target depends on the structure of the country’s economy, with the most important factor in this respect being its stage of economic development.

Emerging or transition economies usually set higher targets than developed economies as these economies are usually less stable, reflects a lack of diversity, low economies of scale as well as low flexibility in product and factor markets

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the effects of low and stable inflation

Low and stable and predictable inflation, is good for the economy…

Smallincrease in prices

Salaries Increase

Demand Increases

Spending Increases

Economy grows

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4.0 to 6.0%Inflation Target

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Why the 4.0 to 6.0% target?

• The ideal would be to target inflation at the level of trading partners of about 2 to 3 per cent.

• Targeting of a lower rate of inflation would choke off Jamaica’s desired accelerated growth rate through tighter monetary policy.

• This level of inflation based on the position of the Jamaican economy was consistent with the Government fiscal programme and the attainment of crucial economic targets such as the debt ratio.

• Need to work at having the economy more resilient to shocks

BOJ committed to predictable, stable

and low inflation.

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Thank You