Economist explains disconnect between inflation and cost of living

Updated (February 8, 2025): This article corrects an earlier version which stated that Head of the Economic Research Unit at First Citizens Bank, Vangie Bhagoo-Ramrattan questioned Barbados’ official inflation figures. 

A regional economic analyst has suggested there may be a disconnect between inflation rates and the cost-of-living pressures being experienced by Barbadian households.

According to Head of the Economic Research Unit at First Citizens Bank, Vangie Bhagoo-Ramrattan, this gap may arise from how the inflation rate is calculated, changes in consumer preferences over time, and wages not increasing in line with inflation.

Bhagoo-Ramrattan, the main presenter at a webinar on the Economic Outlook for Barbados for 2025 on Friday, explained how inflation is measured in Barbados.

“The retail price index (RPI) measures changes in the retail prices of a fixed basket of goods and services, and it should represent spending patterns of the majority of households in Barbados. That’s how the inflation rate is calculated; they use the basket to find the percentage change, and it is also weighted,” she explained during the webinar organised by the Institute of Chartered Accountants of Barbados (ICAB) in collaboration with First Citizens Bank.

“So, the RPI in Barbados is weighted. Food and non-alcoholic beverages accounted for the largest, about 22 per cent; followed by housing, water and electricity, things like that, 15 per cent; and then transport is the third, which is 13.5 per cent.”

Bhagoo-Ramrattan suggested that the disconnect may stem from the calculation of the inflation rate, as the items that make up the basket may not accurately reflect current realities.

“The basket may have been around since 2016. So, obviously, consumer tastes would change over time. So, that might be part of it, the calculation of it,” she argued.

Bhagoo-Ramrattan also addressed the related issue of consumers’ purchasing power. She noted that even if Barbados recorded an inflation rate of one per cent—though that appeared low—it still meant that prices were rising at that rate.

“Now, the problem may be that the pace at which your wages are increasing, it’s not keeping up with the pace of inflation. So, your purchasing power is still being eroded. So, those are some of the reasons why there may be a disconnect.”

In its review of the economy for 2024, the Central Bank of Barbados reported that “favourable” price dynamics had significantly reduced inflation during that period.

The bank pointed out that domestic inflation slowed to an estimated 1.4 per cent on a 12-month moving average basis by the end of the year, representing a 1.8 percentage-point decline from 2023. The regulator is also projecting that inflation will remain low, stabilising around two per cent, as global commodity prices ease. (EJ)