Exchange rate, erratic rains likely to spur inflation

this extent, the achieved rate of inflation for the prior year means that prices as measured by the all-items Consumer Price Index (CPI) increased by an average of 4,9 percentage points between December 2010 and December 2011.
An analysis of the country’s headline consumer inflation during the course of last year shows that although there have been some significant pressures that impacted negatively on the country’s inflation, these pressures were somewhat eased by cautious policies.
Zimbabwe’s annual rate of inflation closed 2010 at 3,2 percent to increase 0,1 percent during the first month of 2011, an increase that was then attributed to a firming South African rand against the United States dollar.
In February, the rate of inflation slowed to 3 percent in February from 3,3 percent in the previous month.
Annual inflation further declined to 2,7 percent in March, which Zimstats attributed to lower prices for telecommunications and medicine.
In April, the inflation rate remained constant at 2,7 percent, further declining to 2,5 percent for the month of May.
In June the rate of inflation increased 0,4 percent to 2,9 percent due to rising international food prices.
During this period, housing-related inflation reflected significant increase following the review of civil service remuneration within the first half of the year.
In the same month, the United Nations Food and Agriculture Organisation’s food price index, which covers prices of a basket of commodities, rose 1 percent to 234 points, up 39 percent compared with the parallel period in 2010, and just below the record 238 points hit earlier in February.
Inflation further quickened in July by another 0,4 percent to 3,3 percent driven by increasing food prices at the time and a decision by the Government to restore duty on selected basic commodities to allow the local industry to recover.
It further gained momentum by increasing 0,2 percent to 3,5 percent in the month of August, the upward shift being necessitated by increases in transport costs, education costs and miscellaneous goods and services.
In September, the upward trend continued as the annual rate of inflation swelled 0,8 percent to 4,3 percent due to a 31 percent increase in electricity tariff that came into effect at that time.
The year-on-year inflation rate for October fell marginally to 4,2 percent, shedding off 0,1 percent on the September rate.
The rate for November remained steady at 4,2 percent, and eventually closed the year at 4,9 percent increasing 0,7 percent.
Generally, month-on-month inflation also oscillated in almost the same pattern.
Although 0,4 percent higher than the targeted projection for last year, the latest rate of inflation means it is still on a positive trajectory for the current year.
This, however, does not suggest that maintaining stable inflation will be smooth sailing this year. That would be to assume limited impact from exogenous shocks such as fuel prices and currency appreciation/-depreciation and simplistic containment of domestic costs particularly the wage bill.
The African Development Bank, in its monthly economic review for December 2011, said that the main drivers of annual inflation last year included communications, transport, housing, water, electricity and other fuels, and education.
As at late last year, this category ranged around 24,5 percent above overall CPI, implying the need for greater stakeholder engagement on the high cost of utilities and services. The AfDB also noted that with low average incomes and loss of employment in some sectors of the economy, many people were relying on rentals as major source of income, which resulted in high rental charges.
Analysts, however, opine that the other major factors that pose a danger to local inflation include the rand/United States dollar exchange rate and South Africa’s inflation, especially as most of Zimbabwe’s imports (both raw and finished products) come from that side.
On the other hand, the issue of food security could pose a new and greater challenge to inflation containment by the Government in the outlook period.
The Agricultural Extension Services recently said Zimbabwe’s maize output for this year should be down 35 percent attributable to the inconsistent rains that have typified the current summer cropping season.
In a January 2012 crop report, Agritex noted that the country planted 247 000 hectares of maize from November to January, down from 379 993 hectares in the same period last year.
The report also notes that farmers planted 130 944 hectares of sorghum and other small grains, compared with 136 131 hectares in the prior year, and that farmers also planted soybeans on 5 079 hectares compared with 13 674 hectares last year.
Negative food crop output can also have broader implications for the economy in general, as food shortages typically result in higher food prices, which in turn drives up inflation.
Food inflation has not been a significant driver of the country’s inflation rate in recent times.
However, a drought situation could result in a significant shift in this regard.