||Central Bank Of Barbados
Domestic prices remain inextricably linked to international market developments. This is especially true for food and energy prices, both of which impact directly the Retail Price Index, through the cost of Food and Non-Alcoholic Beverages, Housing, Water, Electricity, and Other Fuels and Transportation, which together represent 61% of the cost faced by a typical consumer.
The relative size of the Food and Non-Alcoholic component means that fluctuations in this price category impact most heavily on the overall price level prevailing in the economy. While the components that are most directly influenced by fluctuations in international fuel prices, namely the Housing, Water, Electricity, and Other Fuels and Transportation categories together account for a similar proportion of the consumer basket (30%). Even though not directly impacted, food prices are also influenced by the cost of fuel, as energy has a knock-on effect on the food production process.
The significance of fuel as a key component of production and transport, particularly for the international trans-shipment of food was particularly evident after 2007, when high international fuel prices intensified interest in solid biofuels and diverted arable land use away from the production of food. Indeed, Headley and Shenggen (2008) identified surging biofuel demand, chiefly as it relates to the price of maize, as an explanation for the 2005-2008 global food crisis. During this period, Barbados experienced a period of high inflation, where rates averaged 6.1% between 2005 and 2012.
The fundamentals of this relationship were tested, with the rapid expansion of unconventional oil production in North America, which together with lacklustre global demand and the mounting significance of renewables, resulted in the collapse of international fuel prices in 2015. During this period, Barbados experienced one of only four periods of deflation since 1990 and the smallest observed current account deficit since 2011, which is partially explained by a 42% reduction in the price of imported fuel.
More recently, international energy prices have been influenced by market fundamentals, investments in U.S. shale oil, Organisation of the Petroleum Exporting Countries (OPEC) production decisions and actual or potential supply disruptions. A recent example being, the price spikes linked to geopolitical tensions in the Strait of Hormuz. On the other hand, international food prices have been impacted by spill-overs from the U.S.-China trade wars and adverse weather conditions.
Currently, the U.S. Energy Information Administration expects international fuel prices to fall by 8.9%, while the World Bank’s July edition of the Commodity Markets Outlook, forecasted a 10% reduction in international food prices. The Food and Agriculture Organisation of the United Nations, offers some insight by noting that food prices declined marginally in June, where lower prices of dairy and vegetable oils, offset a significant jump in maize quotations. Recent market developments illustrate the need for continued vigilance, given the volatile nature of the international commodities market.
Taken from the Central Bank of Barbados' Review of the Economy for January to June 2019.