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The further drop in the monthly inflation rate to 1,58 percent for April shows that the positive effects of the swathe of fiscal and monetary reforms introduced by the Second Republic continue to pull Zimbabwe into a normal country with a normal economy.
That 1,58 percent is not only the lowest rise in the cost of living since September 2018, but also translates into an annual rate of just over 20 percent, showing that the predictions made by both the Government and the Reserve Bank of sharply falling annualised inflation rates and even a possibility of single digits in the moderately near future are the result of an understanding of fundamentals, not thumb sucking.
For that low figure is not some freak blip on the graph. Since early September last year, about a month after the auction system became fully functional and started supplying the overwhelming bulk of foreign currency required for priority imports, and stocks of inputs bought with black market dollars had been exhausted, monthly inflation has been low and generally falling, with just a nasty, although modest, blip in the run up to Christmas.
In fact, the mean monthly rate over those eight months produces a mean monthly rate of 3,54 percent, just over 51 percent when annualised, which is high, but still just over a quarter of the 194,7 percent that is the actual rise in the cost of living in the last 12 months because of four months of black-market led inflation still included.
And the general trend of falls means even that figure is less useful for prediction. There is still, in too many economic circles, of all places, and more understandably among the general public, an obsession with annual inflation rates.
This is dangerous as it can lead to expectations, and panicky pricing, that are the result of misunderstanding economic indicators.
The annual rates tell us just one thing, how much the cost of living has risen in the last 12 months. That is useful if you are calculating how much your income has to have risen in the same 12 months, after income taxes, to maintain your standard of living. So it is a useful number in wage negotiations, in fact a vital number.
It can tell a lot more in an economy where trends are stable, if monthly inflation, no matter how high or how low, is generally constant. Even in the most stable of economic systems there will be monthly blips and sips, which an annual rate will even out and tell you just how your economy is performing.
But when you have major discontinuities, and Zimbabwe does with a general acceleration in inflation to incredible levels, followed by a sudden crash and then near stability with a general trend of falling, it does not tell you much when it comes to prediction.
Even in its one functional purpose, saying what happened over a year, it does not tell what happened during that year. Perhaps an easy way of thinking about discontinuous functions is to imagine two twins with identical cars living near Harare. They leave home at the same time and return 12 hours later.
In that 12 hours Twin A drives to and from Bulawayo and we get the data, when we do the sums, that this twin was travelling at an average speed of just over 77km/h. Obviously there were stops at toll gates, to buy fuel, to buy lunch and at traffic lights in cities; there was slowing down for urban areas, for heavy trucks climbing hills and for cars and pedestrians crossing the road. But that figure of 77km/h gives a lot of useful information of how good the driver and car were and even an indication of traffic conditions.
Twin B, however, drives 24km to work, parks and then drives 24km home. That twin has done 48km in 12 hours, at an average speed of 2km/h. The average is perfectly correct, and totally useless. It tells us what happened over the day, but not what happened during the day, and there was a major discontinuity which is not accounted for.
One way round the problem, if you really want to know what present trends mean over a year, is to calculate the annual rates of inflation based on present conditions. You use the ordinary compound interest formula.
So we find that the present monthly rate generates just over 20 percent a year, and the average since auction stability generates just over 51 percent, and by doing the two sums we even notice the falling trend. It works the other way as well. As prices were accelerating last year we were not measuring the true horror even using our rapidly rising annual inflation rate, since that included some months where there were still subsidies and partial use of the interbank market.
In fact, in July last year, and since ZimStat collects price data fairly early in a month this was basically the last month of the growing craziness in the black market, monthly inflation hit 35,5 percent, which annualised comes to a whopping 3 740 percent a year, far worse than the 837,5 percent calculated when including some old data. We were far worse off than we thought and it was getting worse.
That acceleration in black-markets, if nothing else, explains the decision to accelerate the last stages of the Transitional Stabilisation Programme so it was completed four months early, which gave a gap while we all absorbed the implications of the coming National Development Strategy and could make our preparations, and also allowed the Government to finalise this year’s budget in calm waters.
The appalling turbulence we saw between April 2019 and September last year, as we absorbed the inherited economic mess and brought everything to the surface, can only be measured with continuous figures, the monthly rates, since the annual rates are useless for telling us what happened or even mapping trends.
That is why, in a quite different area, the public health authorities are so keen on mapping actual data and short-term rolling averages to see the progress of Covid-19, so they can track the arrival and decline of big waves.
They do not look at the averages since the first case, they look at what happens each day and each week, to see what actually occurs and then recommend appropriate action.
Collecting data is important, but interpreting that data is even more important, both when things are getting worse and when things are getting better.
Online Reporter