The Effects of Higher Oil Prices on the Level of Consumer Prices in Jamaica: An Estimation of the Pass-Through Effect for the Period 2001 to 2016

Oil prices on the world market over the last four decades have been viewed with serious macroeconomic concerns in oil-importing countries. In Jamaica, questions have been raised about the extent to which higher oil prices has pushed up the rate of inflation. Over the review period (January 2001 to April 2016), oil price (Petrojam billing price) to the pumps increased by approximately 325 per cent, while inflation rose by 309 per cent, with multiple peaks and troughs within. These increases, together with a high volatility in oil price, have serious implications for macroeconomic policy objectives given Jamaica’s high oil intensity ratio. This paper seeks to assess the inflationary effect of higher oil prices using the pass-through mechanism for the period 2001 to 2016, using monthly data.Results derived from this study show that a one-time 10 percentage points’ increase in oil price, denominated in the domestic currency, would push inflation up by 0.021, 0.020 and 0.014 percentage points during the first three months, respectively, after the initial change in oil price. Using oil prices to the local gas stations, an increase in the price of unleaded gasoline 87, unleaded gasoline 90 and diesel by 10 percentage points show that inflation increased in the following month by 0.02 percentage points, increases similar to that related to higher world prices.