People must read inflation figures carefully

T HE 31 percent year-on-year inflation recorded at the end of last month is a curious mathematical anomaly that has to be interpreted carefully since it is not a long-term trend but a once-off jump, albeit a large one, and so for the next 12 months, a more important measure of the sturdiness or fragility of the Zimbabwean economy will be the monthon-month rates.

If the 31 percent was the result of a continuous process, that is of monthly jumps in the cost of living of between 2 percent and 2,5 percent over a year, it would be worrying, signalling that the Zimbabwean economy was in very bad shape and facing serious structural problems.

In fact, the high number was a result of a large jump of 16,44 percent in October, and 9,2 percent in November. Assuming prices do not move up or down from now onwards, this step-jump, rather than a continuous jump, will still see Zimbabwe’s year-on-year inflation rate remaining at 31 percent until the end of November next year when it will suddenly drop to zero. This is because the year-on-year figure measures the differences in the cost of the basic basket of goods used by ZimStats over a 12-month period.

So a large sudden jump in a cost-of-living index following and preceding long periods of reasonable stability will provide a distorted view of what is actually happening and can therefore, unless understood, lead to the incorrect responses by everyone, those in authority and those producing, buying and selling.

This year-on-year rate is normally a useful measure of inflation, ironing out small monthly differences and giving everyone a fairly good idea of long-term trends and alerting the fiscal and monetary authorities of dangerous reefs that lie ahead. Producers and consumers can use long-term trends to modify behaviour and plan buying and selling strategies.

These long-term trends measure continuous mathematical functions.

A sudden jump, or for that matter a sudden drop, is a discontinuity in the graph. And when they occur, the year-on-year inflation rate does not measure the underlying long-term trends; it measures something completely different, to be precise, the extent of a sudden jump or sudden drop.

Although the discontinuity in Zimbabwe’s inflation graph is a jump-step, a similar perception problem could occur with a drop step.

If prices were rising 2 percent a month in an economy, that economy would be in serious trouble. A sudden price drop of 30 percent, cutting year-on- year inflation to zero, followed further steep monthly inflation, might well convince some that there was no underlying problem, and they would be wrong.

Confusing a long-term trend and a sudden discontinuity can, therefore, be very dangerous. Such confusion in Zimbabwe is easy, since we have seen far far worse when such large jumps were part of an accelerating continuous trend in the 2000s and were definitely not a discontinuity. So understandably, many are very nervous.

But indications are that the jump is, in fact, a discontinuity and not a trend. For a start, there is a growing consensus that the events, panic might be a better word, of late September, October and early November were not sparked off by an incorrect appreciation of a couple of fiscal and monetary policies. Many of us remember some of the drivel that was being peddled on social media at that time.

But since then, things have changed. ZimStats picked up one change, the drop in the month-onmonth inflation from 16,4 to 9,2 percent. It will, by the look of it, be much lower in December and possibly from January or February next year we will be back to “normal” month on month. There was a sudden ascent of the black-market US dollar banknote rate, and then we saw it halve to around 340-100 where it has tended to stick despite the bonus money flowing into consumer pockets, and is likely to drop next month when January disease hits.

There are still some price rises in the pipeline: the requirement to pay duty in foreign currency on imported luxury goods will push their prices up.

But that will not affect the inflation rate since the ZimStats basket is built around what lower-income people in urban areas buy, and they do not buy scotch whisky or prawns. Basics prices seem to have stabilised or even fallen slightly. The Government has stopped creating money. Money supply is stable at around $9,4 billion, and that limits how much inflation is possible. We need to remember that early in the Gideon Gono days, there were already $10 billion bearer cheques, let alone what happened later.

Hyperinflation requires a lot of money to be printed. If none is printed, then no hyperinflation takes place.

So we now need to monitor, carefully, the trend in month-on-month inflation for that will give us the long-term outlook, while continually qualifying for the next 12 months the year-on-year figure with the phrase “after the jump in the fourth quarter of 2018” until the step disappears in the graph.