National Reserve Bank of Tonga

Lower prices in the base year pushed the headline inflation upward

Monthly Inflation

The monthly headline inflation rate continued to decline over the month of July 2018 by 0.1% following a negative 2.5% in June 2018. This was largely attributed to favorable movements in the prices of both local and imported food over the month which outweighed a rise in various imported commodities. Consequently, the domestic component of inflation contributed a negative 0.4 percentage point to the monthly inflation rate which offset a 0.3 percentage point contribution from the imported component of inflation.

Domestic Prices

Over the month of July 2018, movements in the domestic prices was particularly on the local food items which decreased by 1.8% and drove the domestic prices lower by 0.9%. The continued increase in supply of local vegetables and fruits recorded a 4.8% decline in its prices and accounted for a negative 0.5 percentage point contribution. The prices of tomatoes, head cabbages, capsicum, pineapple, carrots and green coconuts had lower prices over the month. This outweighed an increase in the prices of meat, fish & poultry like eggs, tuna, octopus and cockles.

Imported Prices

The monthly imported inflation rose over the month by 0.6% due to an increase in the prices of tobacco and fuel. Upward revisions to the excise tax on imported tobacco drove its price higher by 6.8%, and contributed 0.3 percentage points to the monthly headline inflation. Additionally, the continued rise in fuel prices recorded a 1.4% rise in both prices of diesel and petrol. Movements in the prices of imported food was overall favorable in July. The removal of excise tax on chicken pieces drove its price lower by 7.1%. In addition, the decline in pices of imported fruits, vegetables and sugar was sufficient to outweigh the increase in prices of cereal products and dairy products like butter and margarine. A new excise tax was introduced on margarine and butter which contributed to the rise in its price.

Annual Inflation

Although the monthly inflation rate slightly declined over July 2018, the annual headline inflation increased to 6.1% from a 5.9% recorded last month. This was attributed to lower commodity prices in July 2017 compared to the current period. Therefore, the domestic component of inflation contributed 2.6 percentage points (increasing from 2.0 percentage points in June 2018) to the overall annual headline inflation rate while the imported component recorded a fall in its contribution (from 3.9 percentage points in the year to June 2018) to 3.5 percentage points in year ended July 2018.

Domestic Prices

Despite the continued favorable movement in the prices of local fruits and vegetables over the month, it reflects otherwise when compared to July 2017. As a result, the annual domestic inflation rate has increased to 6.2% compared to a 4.5% last month and 7.4% in July 2017 (Figure 4). The food category remained the highest contributor to the annual domestic inflation rate with 1.7 percentage points compared to 1.3 percentage points in June 2018. These are due to higher prices in agricultural crops, fish, and pastries (Table 1). The second highest contributor to the annual local inflation rate was the price of kava-Tonga with a 45.4% increase over the year and a 0.9 percentage points contribution. Other local goods which also increased included house maintenance goods and household furniture, furnishing & textiles. These outweighed the annual decline in public transportation and communication services.

Imported Prices

The annual imported inflation rate slowed to 6.0% in July 2018 after recording a 6.9% in June 2018 (Figure 5). Imported food prices continued to be the largest contributor which rose by 4.8% and contributed 1.4 percentage points to the overall annual headline inflation. From the food group, the dairy products category had the highest increase of 8.6%, followed by a 5.5% and 5.4% from the categories of meat, fish & poultry and other food components respectively. This outweighed a decline in the prices of fruits, vegetables and cereal products. Movements in the global price of meat and the excise tax on dairy products drove prices higher. The second highest contributor was a 1.3 percentage points from fuel which rose over the year by 17.3%. The cost of diesel and petrol increased over the year by 21.7% and 17.1% respectively. The high fuel prices were due to higher world oil prices which flow through to local oil prices with a lag of 1-2 months.

Additionally, imported tobacco and alcohol contributed 0.6 percentage points to the overall headline inflation mostly due to the increase in the price of tobacco. This was partly driven by the further increase in excise tax on tobacco that was introduced in July 2018. The price of Winfield blue rose over the year to June 2018 by 12.5%. Clothing supplies also increased by 5.2%. Household operation goods and services increased by 1.6% which included various goods such as kerosene, liquid petroleum gas, portable radio player and kitchenware. These outweighed the decline in the price of stationery supplies, medical health services and supplies and house maintenance goods.

Outlook

The Reserve Bank expects the annual headline inflation rate to fall to its 5% reference rate by the end of 2018 due to expectations that the prices of commodities will stabilize on an annual basis. However, adverse movements in global oil and food prices may change this outlook. Additionally, the vulnerability of Tonga to natural disasters also poses a risk to the local food supply and consequently its prices and the inflation outlook. According to the latest Climate Update¹ from the Tonga Meteorological Service, rainfall is forecasted to be average to below average for Tonga in the near term which will be unfavourable for the local food supply.

1 - Issued on 7th August 2018

Enquiries

Economics Department
National Reserve Bank of Tonga
NUKU'ALOFA

Telephone: (676) 24057
Fax: (676) 24201 
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Resources

Inflation - July 2018 Released on 12 September 2018 |  239 KB - Download a copy of the full report.

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