Inflation dynamics locally and globally
Inflation is one of most important economic variables for business, individuals and even countries. It is important to understand the inflation levels in the country you live in for one to make better economic and business decisions. The levels of inflation determine the living standards of the majority and they are many factors that can influence the inflation rates in different countries.
On a global scale, many economists have analysed that the usual economic theories of inflation are gradually being altered especially by the impact of the Covid-19 pandemic. According to the International Labour Organisation (ILO ), the associated lockdowns, mobility restrictions and physical distancing rules, have not only led to a significant increase in unemployment and considerable income losses for many people, but has also altered the spending patterns of consumers and the level of price inflation that they face. In particular, the lockdown measures have affected the supply of and demand for certain products and, hence, their prices.
Zimbabwe’s has had a horrific inflation history with the hyperinflation era of 2000 — 2008 followed by a stabilised dollarised period. The introduction of the bond notes and ZWL currency saw the inflation figures rise again due to the parallel market activities. However in the year 2020, the introduction of the foreign exchange auction trading system brought stability to the foreign exchange market and a down trend in the inflation rate emerged from August 2020. None the less, the beginning of the year 2021 has seen the trend moving slightly in an upward direction. According to the RBZ, Zimbabwe's annual consumer price inflation rose to 362,3 percent in January 2021 from 348,59 percent in the previous month, breaking a run of five consecutive months of slowdown. On a monthly basis, consumer prices inched up 5,43 percent, the biggest increase in five months. The increase may however be attributed to the reduced supply of goods due to lock down measures.
In economics, inflation is a general rise in the price level in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation reflects a reduction in the purchasing power per unit of money — a loss of real value in the medium of exchange and unit of account within the economy
The Consumer Price Index (CPI) is used by the Zimbabwe National Statistics Agency (ZIMSTAT ) to measure inflation. The index acquires its data from an investigation of diverse segments in the economy. It records the prices of several consumer items each month.
The Zimbabwe statistical office announced in August 2020 that commencing from June 2020 they are now publishing blended inflation and Consumer Price Index (CPI). This entails the blending of the inflation for prices that are quoted in US dollars (US$) and inflation for prices quoted in ZWL. This follows the promulgation of Statutory instrument 185 of 2020 which allowed entities to quote and sell goods and services in both US$ and ZWL.
An inflation dynamic that occurred during the year 2020 was the introduction of the blended inflation rate. Statutory Instrument 185 of 2020 permitted companies to charge for their goods and services in US$ and ZWL. According to the Institute of Chartered Accountants Zimbabwe, entities that see an increase in US$ transactions over ZWL transactions will need to do an assessment of whether their functional currency has changed from ZWL to US$ in accordance with International Accounting Standard (“IAS”) 21 which deals with the effects of changes in foreign exchange rates. Selection and use of the general price index in the restatement of financial statements in accordance with IAS 29 requires the use of a general price index that reflects changes in general purchasing power. In Zimbabwe, the currency which was assessed to be in hyperinflation is the ZWL. “Entities that still use the ZWL as the functional currency should continue to use the ZWL CPI and not a blended CPI in the preparation of Inflation adjusted financials,” stated the institute in a press release.
The institute advised that, “a blended inflation index is not appropriate in the preparation of inflation adjusted financial statements as the financials are prepared in a particular functional currency (either ZWL or USD) and not reported in a blended currency. Similarly, any inflation index should also be specific to the reporting currency. Therefore, those entities whose functional currency is ZWL should continue preparing hyperinflation accounts.”
Locally in Zimbabwe, there are other macroeconomic issues that have an influence on the inflation rate in the country, these are; the currency stability and income of the general population as well as availability of the products in supply. To add on these, existing factors are the Covid-19 pandemic and the measures to combat it such as mobility restrictions and lock down. Hence the trend is really influenced by the government decision to reopen the economy or to continuously lock down the economy on top of the existing policy measures to control inflation.
Globally and regionally aggregate inflation has been low in most countries and is expected to remain below central bank targets as a result of weak economic activity.
The World Bank forecasts that Central bank policy rates will generally remain at highly accommodative levels. Asset purchase programmes have helped stabilize financial markets, but their continued use could begin to undermine financial stability in the absence of clearly defined objectives that are consistent with central bank mandates.
However central banks are concerned that inflation in developed countries may go below the target rate, and therefore how they might raise it, is an unimaginable scenario for any economist.
“The prospect of a protracted period of low inflation and interest rates has important implications for both monetary and fiscal policy. In advanced economies, where the room for additional monetary policy support is limited, central bank frameworks are being reassessed, while fiscal policy is playing a more prominent role in macroeconomic stabilisation. Over the longer run, the pandemic has highlighted the urgent need for reforms in advanced economies that harness the productivity benefits of sectorial reallocation and bolster the adoption of automation and digital technologies, along with the strengthening of social safety nets to facilitate this process,” stated the World Bank.
According to a study conducted by the IMF in September 2020, early evidence from advanced and emerging market economies points to an increase in food prices; however, there is no evidence of inflation when considering broader indexes.
There has been, however, a rise in the variance of expected inflation indicating significant uncertainty and a potential risk of de-anchoring.
In conclusion to this over, generally the trend of inflation in this era needs further investigations as more elements are at play and countries are at different levels. For developing countries, reports show that there may be an increase in food prices due to reduced production as result of the Covid-19 restrictions on the other hand, in developing countries, inflation may be low due to reduced demand and reduced income levels since food supply is not an issue in these states.
Mapungwana is a local independent economist and consultant. These weekly New Horizon articles are co-ordinated by Lovemore Kadenge, independent consultant, past president of the Zimbabwe Economics Society and past president of the Institute of Chartered Secretaries and Administrators in Zimbabwe. — kadenge. zes@gmail.com and mobile +263 772 382 852.