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Inflation Down to three-year lowest

Government and the Reserve Bank of Zimbabwe, which look more at fundamentals than historical data, and take trends into account rather than just slapping averages into an equation, see far lower figures coming up with single figures a distinct possibility. For example, the record food harvests now being gathered, and with farmers being paid at market rates, and not being cheated, will tend to keep many basic food prices stable for the next year.

Some business experts say 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 Reserve Bank of Zimbabwe (RBZ) continue to pull Zimbabwe into a normal country with a normal economy.On the other hand some are still pessimistic saying this is just an economy in rebound which will revert back to its real position if fundamentals are not put in place.

Zimbabwe’s monthly inflation rate fell to 1,58 percent in April, its lowest since September 2018, and for the eighth month in a row the country saw monthly rises in the cost of living of less than 5,5 percent, reflecting the stability achieved in August in the exchange rate for priority imports, along with general full allotment for bids for such imports.

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. 

Annualised, that is assuming that mean monthly inflation remains the same for 12 months, the 1,58 monthly inflation would translate to an annual rate of 20,7 percent. But from September last year monthly rates have been tending to fall, with an upwards blip in December and January caused partly, it is assumed, by some producers and retailers trying to mop up annual bonuses, but there were other inputs.

But even with that blip, the mean monthly inflation rate for the eight months from September has been 3,54 percent and the figures for the last three months have all been below that mean, coming down from the January high of 5,43 percent to 3,45 percent in February, 2,26 percent in March and now 1,58 percent in April.

ZimStat, the national statistics agency, does its monthly surveys of the costs of all items in the shopping basket it uses to calculate the cost of living towards the middle of each month. So that record jump in January since the auction rate stabilised would include the pre-Christmas and Christmas period.

However, even with the blip, that mean of 3,54 percent a month translates into an annual rate of 51,81 percent, high but far lower than we have seen for some time. 

Since a fair number of “independent” estimates of Zimbabwe annual rate are predicting around 50 percent this year, it seems that many of these estimates are based on that eight-month post-auction average without factoring in the general monthly falls in the last quarter.

Government and the Reserve Bank of Zimbabwe, which look more at fundamentals than historical data, and take trends into account rather than just slapping averages into an equation, see far lower figures coming up with single figures a distinct possibility. For example, the record food harvests now being gathered, and with farmers being paid at market rates, and not being cheated, will tend to keep many basic food prices stable for the next year.

The actual annual rate, which includes the last three months of exceptionally high inflation plus the transitional August figure, has fallen to 194,7 percent, its lowest for almost two years, from 240,6 percent in March, 321,6 percent in February and 362,6 percent in January. It reached its modern peak at 837,5 percent in July last year after a year of rising large monthly price rises.

This inclusion of old data from a time when there was a rapidly rising gap between official rates and black-market rates, with most industries having to procure currency on the black market even for priority imports, means that the annual rate only tells us how much the cost of living has risen in the last 12 months.

With the discontinuity brought about by the price stability since the auction, annual rates at present are not giving much help in telling what has happened within that 12 months, such as the sudden and very sharp drop in monthly rates from September. For that monthly rates are more useful.

However, annual rates will continue to plummet for the next four months as chunks of old data are removed from the equations and then rather suddenly the historical data will produce annual inflation rates of under 50 percent.

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.

Inflation actually measures changes in the cost of living of the average lower-income urban family, say a family living in Highfield in Harare. ZimStat assembled, through household surveys, a basket of goods and services of what a good statistical sample of such families actually buy or pay for each month. This basket includes many scores of items, some having a major effect on the cost of living and some less.

Each item is grouped and weighted. At present, the four main blocks of items in the consumer price index are: food and non-alcoholic beverages, which make up 31.3 percent of total spending; housing and utilities (27.6 percent); transport (8.4 percent) and miscellaneous goods and services (6.5 percent). The smaller block of items are: household contents, equipment and maintenance (5.3 percent); alcoholic beverages and tobacco (4.9 percent); clothing and footwear (4.3 percent) and education (4.3 percent). A catch-all of the remaining 7,5 percent would include communication, recreation and culture, health and restaurants and hotels.

This means that a modest rise in average food prices can have quite a big effect, and even a significant jump in bus fares can add a few percentage points to monthly inflation, as it did when Zupco went through a run of fare doublings. Yet a largish jump in the price of shoes might have a far smaller effect on the general cost of living, simply because people do not buy shoes every month. But for the family having to buy new shoes for all children for school, there would obviously be a big jump one month, but the statisticians even that out over a year.

This average family does, when you look at its shopping basket, live fairly simply, tending for example to buy a cup of sugar beans and a couple of tomatoes when it wants baked beans rather than squandering money on a tin. Even that 7,5 percent in the catch-all of other items will tend to be spent on airtime and the odd clinic fee, rather than on a family holiday in a hotel.

People who are better off will have, again on average, a different distribution of spending and include more items. While the bigger and fancier house might keep spending on housing at 27,6 percent of income, the percentage spent on food, the biggest item in a lower-income budget, will be a lot lower. A CEO might earn 20 times as much as a tea-maker, but is unlikely to spend even five times as much on food, even with imported luxuries. 

Generally the poorer a family the bigger the percentage of its income goes on food, which is reflected in the ZimStat basket for the cost of living statistics.

This is one reason why the exchange rate stability from the foreign currency auctions had such a dramatic effect on the monthly inflation figures, since very little in that lower-income basket is now funded from the black market. It also explains why jumps in some items, such as Mercedes Benz spare parts, might not cause a murmur on the monthly rate, since they are not in the basket, yet an equivalent Zupco fare rise might cause a distinct blip.

Ross Moyo

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