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08.07.2009 Feature Article

Inflation: Misconceptions and Political Obfuscation

Inflation: Misconceptions and Political Obfuscation
08.07.2009 LISTEN

“They say inflation is going down, but the price of a ball of kenkey is still going up”

Does this statement ring a bell? You might have heard it once or umpteen times, on radio, TV, or elsewhere, say campaign grounds. Our politicians and political commentators say it all the time. Some deliberately intend to mislead us, the public, into thinking that declining inflation means prices are falling, just for their (selfish) political gain.

Inflation is a rate of change (as opposed to change), and has to do with persistence. A one time price hike is not inflation. Inflation does not refer to individual prices; it refers to the general (aggregate) price level as measured by, say the Consumer Price Index (CPI), which takes into account a market basket of goods and services that a typical family (especially in urban areas) buys. So it is possible that whilst the price of kenkey is going up, some other prices in the basket are going down.

What is even more subtle is the fact that inflation can be reducing even when prices are increasing. How? Because it is a rate of change, when prices increase but by less than preceding rates, inflation declines. Let's see how. Assume that the general price level increases from 100 to 150, and then to 240, and then to 450, in that increasing manner. The rate of change will thus be 50%, 60%, and 87.5%, respectively. Because the rate of change is increasing, inflation is going up. Now suppose the price level increased from 100 to 150 (50%), then to 210 (40%), and then to 273 (30%), etc. What we see in the latter hypothetical example is that even though the price level is increasing, the rate at which it is increasing if falling ( from 50% to 40% to 30%), and so inflation is dropping! Therefore, falling inflation does not mean that prices are falling. It just tells us that prices are increasing at a decreasing rate. Let's not allow the politicians to fool us. When it comes to car loans, ex-gratia, etc they are together as one. We have to know what they tell us, and tell them when they are lying to us. And vote accordingly.

One other thing I wish to clarify: “Do we eat inflation?” You would hear this one but only from the opposition parties. “Will falling inflation put money in our pockets?”Well, the short answer is YES. Falling inflation won't come to us directly as a meal on the table, but when prices are low, we are all happier. Inflation erodes the value of our salaries, and reduces our purchasing power. What Gh¢ 10 could buy in October of 2008, as it stands now, cannot buy the same quantity of that good today. To the extent that falling inflation reduces the rate at which the worth of our money gets swept away, we “eat” inflation, and so it should be a concern.

Why do politicians make noise about inflation? We recorded 20.56% and 20.06% inflation rates in April and May respectively (myjoyonline/ June 12, 2009), which is still pretty much high, but nowhere near our all time record of 123% in 1983. How about the inflation rate in Mugabe's Zimbabwe, which is in excess of 230 million percent? That's the world's record, no one ever desires that. A teacher's salary can't even transport him to and from school for a month, as it stands now in Zimbabwe. Inflation has determined the outcome of elections in some countries in the past, and a good example has been Argentina in the 1980s with inflation hitting a high of 4,923.3% in December, 1989.

In contrast, inflation has been under 5% (from January 2000 till date) in the US. In fact, the figures are even negative for March, April, May 2009 (what is called deflation). The story is not different in the Euro Zone where since 2001, 3.1% was a record high in November 2008.

The main causes of inflation in Ghana are increases in monetary aggregates (money supply), petroleum price increases, exchange rate depreciation, and poor agricultural production. One does not need detailed regression analysis to know this. Simple eye-balling of data available from ISSER tells us the extent to which these variables determine inflation. For instance, since 1992, the highest rate of inflation recorded was 74.4% in 1995 when money grew at 46% in 1994. Petroleum prices had increased by 20% in 1993, 18% in 1994, and 24% in 1995. The Cedi had depreciated by 25% in 1994, and 28% in 1995. Agricultural output had worsened, etc. When the rate of money growth slowed down, coupled with relatively stable exchange rates and improved agricultural productivity between 1996 and 1999, inflation had declined to 12.6%.

What happened in 2000? Increased money supply, increased fuel prices, and depreciation of the Cedi, worked in synergy, to trigger inflation to 40.6%. The rates were better between 2002 and 2007 as inflation fell to 15.2% in 2002, shot up to 23.6 in 2003, down to 11.8% in 2004, up to 14.8% in 2005, down to 10.5% in 2006 and a little up to 12.7% in 2007.

Why can't we keep inflation down? Some of the causes are exogenous, so there is very little or nothing we can do about them, e.g. petroleum prices. At least for now, not until 2012, we don't produce oil. So we have to take the world prices as given, thanks to deregulation. But this is the one cause that cuts us deep. Because increases in petroleum prices translate into higher transportation costs, and into higher food prices, each time petroleum prices increase, we feel it in the market basket (and the CPI for that matter).

Money growth: Very unfortunately, our Central Bank does not have “autonomy”! The government of the day manipulates it the way it “deems fit”. If we can keep money supply growth at minimum, it will curb inflation, but of course, not by increasing the prime rate. It is sad that whereas the federal funds rate is under 1% in the US, and the benchmark rate set by the European Central Bank is 1% in the Euro Zone (since May 2009), we (Ghana) still have our prime rate at a preposterous 18.5%.

Exchange rate depreciation: We are experiencing a free fall of the Cedi relative to major convertible currencies. We are worried. But we are all part of the problem. I recall what Dr. Laryea of UG, Economics Department used to tell us: “The exchange rate is a price! And prices are powerful. Don't temper with it”. The Central Bank has been doing its part in trying to stabilize it in what is called dirty-floating exchange rate regime. But I guess what we need to do is to re-orient our tastes. Our penchant for imported products is way above the sky ( e.g. we prefer perfumed rice to locally produced rice, imported chocolate to Golden tree chocolate, etc), and as long as this continues, we would always need more Dollars, Euros, and Pounds to import. And this will continue to depreciate our Cedi especially if we are unable to export more to generate foreign exchange.

Post harvest losses take a chunk of farm produce every year. Efforts have been made over the years and are being made to deal with storage problems and road networks to the farms, but there's still more work to be done. Maybe we need a complete overhaul of our agricultural sector. But we need to ensure that we minimize post harvest losses, and at the same maximum general agricultural productivity.

God Bless US All, and God Bless Ghana

Iddisah Sulemana, Graduate Assistant, Department of Economics, The University of Akron, Ohio, USA. ([email protected])

Resources: ISSER , “State of the Ghanaian Economy”, yearly editions (2000 to 2007)

Boston.com, Ghanaweb.com, Myjoyonline.com

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