Recent data released by the Central Statistical Office indicates that there was a slight pick-up in domestic inflation in September. Headline Inflation, measured by the 12-month increase in the Index of Retail Prices, rose to 2.5 per cent in September 2011 after having slowed to a historic low of 0.6 per cent in August 2011. On a monthly basis, headline inflation increased by 1.3 per cent in September following an increase of 1.4 per cent in August. The increase in food prices was largely responsible for the pick-up in the headline inflation rate. On a year-on-year basis to September, food inflation rose by 4.3 per cent after declining by 0.3 per cent in August.
Higher international prices may have begun to impact several categories of the domestic food basket. Faster year-on-year price increases were recorded for bread and cereals (6.2 per cent in September from 5.3 per cent in August), milk, cheese and eggs (8.4 per cent from 7.5 per cent in August), oils and fats (8.8 per cent from 6.5 per cent) and sugar and confectionery products (8.2 per cent from 6.7 per cent). The fruits sub-index, which had been increasing at a strong pace for some time now, also accelerated to 39.2 per cent (year-on-year) in September from 38.4 per cent in the previous month. In contrast, prices slowed for meat (7.6 per cent) and fish (5.4 per cent) and declined for vegetables (-7.5 per cent).
Core inflation which excludes the influence of food prices, edged up to 1.3 per cent in September from 1.2 per cent in August 2011. The sub-indices for alcoholic beverages and tobacco and clothing and footwear posted faster year-on-year increases of 6.2 per cent and 3.0 per cent, respectively. Credit conditions have continued to improve steadily although economic activity, particularly in the non-energy sector, is still quite lethargic. On a year-on-year basis to August, private sector credit extended by the consolidated financial system rose for the fourth consecutive month by one per cent, albeit at a slightly slower pace than in July. Among the major categories of lending, consumer lending rose by 4.2 per cent in August while real estate mortgage lending maintained a robust growth momentum of 9.6 per cent.
Meanwhile, the level of business lending remained unchanged in August from a year ago, suggesting that the sharp rate of decline in business loans experienced for the past several months might finally be bottoming out. As the pace of Government's capital spending gathered momentum, substantial net fiscal injections during the last two months of fiscal year 2010/2011 resulted in an unprecedented build-up of financial system liquidity. Commercial banks' excess reserves, which averaged TT$1.7 billion in June, reached an average of TT$4.5 billion in the first three weeks of October.
Given the sharp build up in liquidity, there was no activity on the inter-bank market nor were there repo transactions with the Central Bank. In the face of significant excess liquidity, short-term interest rates have declined with the three-month treasury bill rate falling to 0.25 per cent in October from 0.73 per cent in July. The differential between the TT and US 3-month treasury bill rates also narrowed to 0.23 basis points in October from 71 basis points in August.
