Caribbean Inflation Crisis: Fuel, Food and Construction Costs at Breaking Point — June 2022

Publication Date: 3 June 2022  |  Coverage Period: 3 May – 2 June 2022

Morning Briefing

• Caribbean consumer price inflation surged to multi-decade highs across virtually all regional economies during May 2022, with Jamaica recording headline CPI above 11% year-on-year, Barbados posting inflation above 9%, and Trinidad and Tobago seeing food prices rise more than 15% compared to May 2021.
• Construction costs across the Caribbean have now risen 30–50% compared to pre-pandemic 2019 levels, with contractors across Jamaica, Barbados, and Trinidad and Tobago reporting that the combination of supply chain disruption, Russia-Ukraine commodity price shock, and freight cost inflation has made affordable housing delivery near-impossible at pre-crisis price points.
• The US Federal Reserve raised rates by 50 basis points in May 2022 and signalled further aggressive tightening ahead, with markets pricing in a Fed Funds rate of 2.5–3.0% by year-end 2022, creating mounting pressure on Caribbean central banks to respond and on Caribbean mortgage lending rates to adjust upward.
• Fuel subsidies and duty relief packages announced by Jamaica, Barbados, and the Dominican Republic in response to elevated energy import costs were placing significant strain on government budgets, with fiscal space narrowing even as tourism revenue recovery was gathering pace.
• The Caribbean Development Bank launched a regional consultation on a proposed Caribbean Construction Materials Procurement Facility, aimed at enabling bulk purchasing of steel, cement, and other building materials to counteract the individual-country cost disadvantage facing small island builders.
• Trinidad Carnival 2022 — postponed twice from its traditional February date due to COVID — was rescheduled for mid-2022, with the event expected to generate substantial economic activity and short-term accommodation demand across Port of Spain and its environs.

Caribbean Inflation: A Multi-Dimensional Crisis

The Caribbean’s inflation crisis has now reached a level of severity not witnessed in most of the region for decades. The convergence of Russia-Ukraine commodity price shocks, sustained global supply chain disruption, recovering domestic demand, and the lagged pass-through of earlier currency movements is generating consumer price inflation across the region that is materially above the tolerance levels of both households and monetary authorities.

Jamaica’s headline CPI reading above 11% year-on-year represents the island’s highest inflation rate in more than two decades. The composition of that inflation is particularly concerning: food and energy prices, which are dominated by imported goods and are therefore directly connected to global commodity markets, are the primary drivers. Bread, cooking oil, fuel, and electricity costs have all risen sharply, with the most severe impact felt by lower-income households for whom these necessities represent a high proportion of total spending. The Bank of Jamaica’s response — which has now included several policy rate increases, bringing the rate to 5.5% from the pandemic-era low of 0.5% — is intended to anchor inflation expectations and slow demand-driven price pressures, but has limited ability to address the supply-side and import-driven component of the current inflation episode.

Barbados, operating under its IMF Extended Fund Facility, has faced the inflation challenge within a constrained fiscal framework. The government has implemented targeted relief measures for the most vulnerable households while avoiding large generalised subsidies that would compromise its fiscal programme. Prime Minister Mottley has been vocal internationally in arguing that the international financial architecture needs reform to better address the vulnerability of small island developing states to external shocks — a position that has gained traction in development finance circles under the banner of the Bridgetown Initiative.

Trinidad and Tobago’s food price inflation above 15% year-on-year is particularly striking for a country that is a net energy exporter and therefore not experiencing the same fuel price pain as its Caribbean neighbours. The food price surge reflects the global commodity market transmission that is affecting the entire region regardless of individual energy positions. The government has deployed windfall LNG and oil revenues to fund fuel subsidies and targeted food assistance, but there are growing concerns about the fiscal sustainability of large subsidy programmes and their compatibility with the government’s broader fiscal consolidation objectives.

Construction Cost Crisis: Affordable Housing at the Breaking Point

The Caribbean construction cost crisis has now reached a level that is fundamentally challenging the delivery model for affordable housing across the region. The cumulative price increases in key building materials since 2019 — steel rod up 60–80%, cement up 20–30%, imported timber up 50–70%, PVC and electrical fittings up 30–40% — when combined with the energy cost of construction equipment operation and the increased cost of importing materials by sea, have resulted in a total construction cost increase of 30–50% compared to pre-pandemic baselines in most Caribbean markets.

The implications for affordable housing are stark. A residential unit that a government housing agency or affordable housing developer could deliver at a capital cost of JM$8 million in 2019 now costs JM$11–12 million to construct, before allowing for the increased cost of land and financing. If that developer or agency must sell at a price that is affordable to the median household — broadly defined as requiring no more than 30% of monthly income in mortgage repayments — the gap between economically justified sale price and actual delivery cost has widened substantially, creating a viability challenge that no amount of demand-side subsidy can fully bridge without addressing the supply-side cost structure.

The Caribbean Development Bank’s proposed Caribbean Construction Materials Procurement Facility represents a potentially significant regional response to this structural challenge. The concept — which was presented at a technical workshop in Bridgetown in late May — involves the establishment of a CARICOM-level procurement vehicle that would aggregate the building material import requirements of member state housing agencies and construction programmes, negotiate bulk purchase contracts with international suppliers, and distribute materials to member states at cost. The potential savings from bulk procurement, relative to the country-by-country purchasing that currently prevails, could reduce material costs by 10–15% — a meaningful but partial offset to the overall cost inflation challenge.

Private sector developers in Jamaica, Barbados, and Trinidad are responding to the cost environment in various ways. Some have paused or delayed projects where feasibility models no longer stack up at revised cost assumptions. Others have reduced specification — using simpler finishes and fitting-out standards to reduce input costs without compromising structural integrity. A growing number are actively exploring alternative building technologies: prefabricated construction, modular systems, and locally produced materials that avoid the freight cost component that is one of the largest drivers of Caribbean construction cost inflation.

Mortgage Market Under Rate Pressure: First-Time Buyers at Risk

The rising interest rate environment is adding a demand-side dimension to the Caribbean property market’s already challenging supply-side cost pressures. The Bank of Jamaica has now raised its policy rate to 5.5% — a 500 basis point increase from its pandemic-era low — and commercial bank mortgage rates in Jamaica have begun to adjust upward in response. A first-time buyer who would have qualified for a JM$15 million mortgage at 2021 rates may find their purchasing power reduced by JM$2–3 million at current rates, a squeeze that is disproportionately affecting the middle-income market segment where demand had been strongest.

The National Housing Trust’s role as a counter-cyclical mortgage provider has never been more important. The NHT maintains subsidised mortgage rates for qualifying contributors, and its below-market pricing provides meaningful protection for the segment of first-time buyers who have NHT accumulations sufficient to support a purchase. However, the NHT’s rate structure will ultimately need to reflect the higher cost of funds that the broader rate environment is creating, and any upward adjustment to NHT rates — however gradual — will have a material impact on the number of households who can achieve homeownership at current property prices.

In Barbados, the Eastern Caribbean Central Bank’s maintained policy framework provides stability, but the broader reality of rising global rates is feeding through via the cost of commercial credit. The Eastern Caribbean dollar’s peg to the US dollar means that, as the Fed tightens aggressively, the effective import price of credit for Barbadian financial institutions increases. This is a less direct mechanism than in Jamaica, where the BOJ has its own independent rate-setting function, but the cumulative effect on lending rates and mortgage availability is real and is being felt by prospective buyers in the middle market.

Trinidad Carnival 2022: Economic Boost for Port of Spain

Trinidad and Tobago’s long-awaited Carnival 2022 — postponed from its traditional February timing due to COVID concerns and rescheduled for mid-2022 — represents a significant economic event for the twin-island republic. Carnival is estimated to contribute approximately TT$1.5–2 billion to the Trinidad economy in a normal year, through a combination of direct spending by local participants, visitor expenditure from diaspora and international carnival-goers, and the multiplier effect on accommodation, transportation, food, and retail sectors.

The delayed Carnival has generated extraordinary pent-up demand. The two-year absence of the event has suppressed cultural expression and economic activity in the creative and events sectors, and the appetite for a full-scale Carnival — with bands, fetes, and the complete social and cultural experience — is palpable across the Trinidad population. International bookings from diaspora communities in the UK, US, and Canada are reported to be strong, and Port of Spain accommodation — already a constrained market at peak Carnival times — is effectively sold out for the event period.

For the short-term rental and accommodation market in Trinidad, the Carnival period provides one of the most lucrative revenue opportunities of the year. Property owners in Port of Spain and its immediate environs who list their properties on short-term rental platforms routinely achieve rates during Carnival week that represent multiples of normal nightly prices. The short-term rental market for Carnival 2022, reflecting both the pent-up demand and the generally elevated rate environment that has characterised Caribbean accommodation markets since tourism recovered, is expected to generate exceptional returns for participating property owners.

Caribbean Leaders This Month

Trinidad and Tobago leads this month by virtue of the Carnival 2022 economic boost, its position as a relative beneficiary of elevated energy revenues, and the short-term rental market’s extraordinary performance around the festival period.

Barbados continues to demonstrate institutional strength through its IMF programme adherence and Prime Minister Mottley’s international advocacy through the Bridgetown Initiative, which is gaining traction as a framework for reforming how small island developing states access climate and development finance.

Jamaica faces its most complex policy environment in years — high inflation, rising rates, construction cost crisis, and NHT affordability pressures — but the tourism sector’s recovery momentum and luxury property market strength provide important offsets to the domestic economic headwinds.

Dominican Republic continues to attract strong foreign real estate investment despite the inflation environment, with the Cap Cana luxury market in particular showing remarkable resilience to the economic headwinds that are affecting more affordable market segments.

Guyana approaches the Liza Phase 2 production milestone with oil revenues continuing to exceed budget assumptions at current prices, enabling expanded housing and infrastructure programmes that are beginning to provide real supply relief to the Georgetown market.

Cayman Islands — operating in a relatively high-income environment with a strong financial services sector and luxury tourism market — is better insulated from inflation pressures than most Caribbean neighbours, and its property market continues to benefit from strong demand from international buyers and renters.

St Lucia is approaching the summer tourism season with strong bookings and an improving hotel development pipeline, though construction cost inflation is affecting the delivery timelines of several resort projects.

Overall Performer of the Month: Trinidad and Tobago. The combination of Carnival 2022 economic stimulus, elevated energy revenues providing fiscal relief, and extraordinary short-term rental market performance makes T&T the standout performer for this coverage period.

Looking Ahead

June marks the formal start of the Caribbean summer tourism season, and the industry is entering the period with the strongest demand pipeline in years. The critical question for the next few months is whether the inflation environment — which is squeezing Caribbean household budgets and adding cost to tourism operations — materially damps the extraordinary level of demand that booking data has been suggesting. Early June indications suggest the tourism boom is proceeding broadly on track, with airlines reporting strong load factors and hotels confirming occupancy projections.

The construction cost crisis is unlikely to resolve in the near term. Global commodity markets remain elevated, supply chain disruptions continue, and freight costs, while modestly off their 2021 peaks, remain far above pre-pandemic norms. Caribbean governments and developers need to plan for an extended period of elevated construction costs and adapt their housing delivery models accordingly. The CDB’s proposed bulk procurement facility deserves urgent support and rapid implementation.

The mortgage rate environment will be a key determinant of first-time buyer market activity through the second half of 2022. As the Fed tightening cycle accelerates, Caribbean central banks and mortgage lenders will need to balance the anti-inflation mandate with the risk of pricing a generation of first-time buyers out of the property market at a moment when affordability is already under severe pressure from construction cost-driven price increases. The NHT’s rate and lending policies will be central to this balance in Jamaica.

The Caribbean Property & Investment Review is published monthly and covers developments during the preceding calendar month. All factual statements reflect information publicly available at the time of publication.