Does inflation rate matter?

Takunda Mugaga Economic Agenda
The performance of most African governments is normally measured by two macro-economic indicators which happen to be the unemployment rate and the inflation rate. Economic theories had been awash with principles which suggest that one can only trade off between these two major head-aches for governments.
To date, there is still debate on what constitutes an inflation problem.

Some scholars believe inflation can only be worth mentioning when it is significant and consistent over a given time period, if prices are to rise by 1 percent, the argument is there is no inflation.

If prices are to rise by 3 percent inconsistently or in other terms in a cyclical fashion, it will also not be considered inflationary.
Zimbabwe has experienced double-digit inflation since the mid-1990s and by the end of 1999 it was approaching 45 percent by official records.

The decimated supply side of the economy posed demand pull inflation with a suffocated exchange rate cum a weaker infrastructure base raising the real costs of production.

It is quite revealing that the country’s inflation rate is now arguably the lowest in the sub-Sahara Africa region. This is against the backdrop of a surprisingly dislocated economic structure with literally no middle class to mention while poverty levels and economic sanctions are gnawing into the social veins of the populace.

The unjustified utility bills normally levied on residents seems not to be felt at Consumer Price Index level with its difference from the Producer Price Index almost non-existent.

This could be evidence of an insignificant component of fuel costs in the determination of CPI as well as irrelevant and archaic model of determining inflation rate in Zimbabwe.

The prospects of a declining inflation rate in Zimbabwe are higher regardless of an already lower inflation rate with the trend expected to manifest in a long run decline behaviour while the short-run behaviour of price trends might have upward spikes.

The revision of the GDP growth downwards to 3,4 percent is expected to have inflationary effects as the major sectors of the Zimbabwean economy are operating at way below 40 percent capacity.

The co-hosting of the United Nations World Tourism Organisation General Assembly by Zimbabwe and Zambia gave evidence to the serious underutilisation of our hospitality infrastructure with most of the hotels, lodges and villas having been overbooked for the event, a feat which was last experienced in the 90s.

This phenomenon of price decreases which is not benefiting the ordinary citizens of Zimbabwe is strange, the pitfalls of a reduced price level is on the stifling investment in real business activities as well as reduced appetite for research and development considering the depressed returns that one is expected to get from such investments.

Indeed, it does promote planning, but this seems not to be working in favour of the present economic landscape in Zimbabwe.
What with the declining price levels due to the influx of imports and the liquidity crunch.

Without proper trade policies to manage the balance of trade, the local industry is reeling from an influx of cheap imports as the situation continues unabated.

This had led to the crowding out of locally produced goods given the fact that the cost of production in Zimbabwe is relegating us to the lower echelons on the radar of both comparative advantage and absolute advantage.

It is therefore difficult to come up with an interest rate policy when inflation is not representative of the real economic activity.
This in turn impacts negatively on the prospects of the financial service sector growth, money multiplier effects and job creation. This means the revival of the money market also depends on how we account for and model the inflation rate determination.

The only feasible way to come up with attractive financial instruments such as Treasury bills and bankers acceptances rests on a viable interest rate transmission mechanism which is premised on the average CPI which will give room to positive interest rates.

Given the prevailing macro-economic fundamentals, the possibility of inflation coming down is quite high, albeit a decline which is propagated mostly from exogenous factors while the domestic endogenous component remains suppressed.

The business community has virtually lost interest in inflation figures not because they do not assist in decision making, but simply because they had proven to be misleading in terms of how they impact on the bottom line and liquidity of business operations.

Zimbabwe is proving to be the only country in the world without a top level prerogative to manage inflation and this is regardless of the existence of a weaker supply side within the economy.

The adoption of the US dollar alongside the openness of the economy due to the relaxation of the tariff regimes which opened the market to cheap imports are helping to manage the Zimbabwean inflation rate at the expense of ordinary citizens who want to see job creation, protection of infant industries following the empowerment of new indigenous entrepreneurs and the creation of lines of credit.

It could be the right time for the nation to choose between basking in the glory of low inflation levels and strengthening policies which could protect local industries while exposing the nationals to intricacies of price increases.

Thank you and God bless you.

 Christopher Takunda Mugaga is an economist and the Head of Research for Econometer Global Capital, a regional finance and economics research firm. He can be contacted on: [email protected] or +263 772 340 353 / +263 776 266 062.