Determinants of Inflation in Jamaica

The COVID-19 pandemic was a structural break in government policies and operations as unprecedented lockdowns and restrictions in movement heralded a change from the pursuit of macroeconomic stability to saving lives and livelihood. Economic activities were significantly affected. Fiscal rules were suspended to facilitate an increase in transfer payments to vulnerable households and firms. High inflation became an endemic issue with an impact on rising poverty and social tensions.Supply disruptions and a pandemic-induced change in consumer behaviour increased the prices of certain goods and services. Average rate of inflation increased from 3.9 per cent in 2019 to 6.4 per cent in 2020, and the rate of RGDP fell from 0.9 per cent to negative 9.9 per cent in 2020. The higher rate of inflation became a serious concern for the BOJ since their price stability mandate was under threat and high inflation is seen as a regressive taxation against vulnerable groups.To control inflation within the BOJ’s 4 to 6 per cent targeted range, it is necessary to understand its major determinants. This paper seeks to explore the major determinants of the inflation process in Jamaica, using annual data for the period 1960 to 2021. An Autoregressive Distributed Lag (ARDL) model is applied to study the short-run and long-run determinants.Empirical evidence indicates that the significant variables (at the 5 per cent level) in both the short- and long-run are agriculture output, exchange rate, government expenditure, oil prices, broad money supply and nominal GDP. These variables, with the exception of broad money supply, affect inflation positively by varying magnitudes. Domestic interest rate and global commodity index are significant at the 10 per cent level in the general model and are omitted.