Editorial Comment: Monthly inflation now drifting down

01 Aug, 2022 - 00:08 0 Views
Editorial Comment: Monthly inflation now drifting down

The Herald

THERE are signs that the dreadful inflation spiral of the last few months seems to have peaked and the almost continuous spiralling of prices might be coming under control.

By July last year the monthly inflation rate was down to 2,6 percent and it looked as though we were well on the way to the sort of stability we could expect with the fiscal and monetary discipline of the Second Republic, basically living within our means with the Government only spending what came in from all those taxes we pay and no “printing” of money, digital or through the presses.

Then, contrary to expectations and the market fundamentals, the monthly inflation rate started creeping up. First between 4 percent and 7 percent, worrying and pushing up prices steadily, but not an explosion. 

A fair amount of this rise was driven by global inflation, largely driven by the rising crude oil prices as the world came out of Covid-19 and private motoring and movement took off again as national lockdowns were lifted. 

Then in Zimbabwe came the April figures, 15,5 percent, May was 21 percent and June saw 30,7 percent. This explosion was largely driven by the foreign currency black market and the insistence by manufacturers of using that rate to price their goods. 

We know this is so because the worst of the explosion was confined to food and health, with other sectors seeing serious rises, but not so serious as those two. That included transport costs where rising fuel prices are obviously critical.

Health has only a small input into the average shopping basket, big for people who are sick, but a lot of people do not fall sick every month so the average input is small. But the health sector, including the pharmacies, cost everything in US dollars and then convert at the black market ask rate, the highest exchange rate there is. 

They have been doing this all along since the introduction of the Zimbabwe dollar and while they were stopped from trying to use nothing, but US dollars, no one has yet managed to get this sector to abandon the black market rates. 

Because people are desperate when they are sick, the sector gets away with this. So the inflation rates in health costs are a useful marker for a sector that uses nothing but the black market rates.

But during our present inflation spiral, the indexes for food and non-alcoholic beverages rise almost identically in unison with the indexes for health, showing the same conversion factors are being used.

Since food is the largest single input into the average shopping basket, at 31,5 percent of the average household spending, any rise in food prices affects monthly inflation seriously, and a top-of-the-range rise in food prices can drive inflation rates.

The intense competition in the retail sector will tend to force retailers into just following their suppliers, rather than adding in their own manipulations. 

Most major retailers impose standard percentage mark-ups on each category of goods, although they are probably having to work on replacement costs at present. 

Even when a handful of manufacturers tried to fully dollarise prices, the retailers were careful to put up notices to make it clear this was not their idea, and in any case that was stopped promptly by the authorities who fired a broadside across the bows of the manufacturers rather than just a single shot.

But in July there was some easing of the rate of inflation. The figures at the end of last week showed monthly inflation falling to 25,6 percent, still outrageous and the second highest monthly rate since the auctions opened in 2020, but below the June rate.

The annual rate continued to rise, since the July figure this year was a lot higher than the July figure of last year that it replaced in the annual calculation table. 

But when you need to look at trends, annual rates are not much use; it is the monthly rates that give the trend while the annual rate gives the overall result over the last 12 months and nothing more. It is a limited and very blunt instrument.

The July fall surprised some, but the main reason appears to have been the basket of interventions by the authorities. 

Because monthly inflation figures are calculated on prices fairly early in the month, these would have been the earlier interventions, those in June and very early July, and there have been a lot more since.

Last week there were a number of products, including some brands of cooking oil, actually falling in price and after the mid-month increases a number of others sort of stabilising. 

This again would largely be a result of the interventions of the authorities, including the higher rate of allotments in the foreign currency auctions and the shorter times between allotment and payment.

A lot of the interventions have been stopping cheating, rather than trying to impose price controls and the like. 

Controls are known to be counter productive, leading to shortages, but there has been some heavy pressure to follow the rules with banks forced to stop fuelling inflation by over open lending and in any case pushing interest rates up to a minimum of 200 percent was using market forces to curb that.

In addition there has been consumer resistance, and serious consumer resistance. Although civil service pay, and a fair amount of private sector pay, was raised in July, the civil service increase being a unilateral pay increase while talks continue, consumers are still tightly strapped. 

The double reduction in fuel prices in the second half of July, amounting in total to 10 percent on petrol and 6 percent on diesel, obviously had some effect, and according to the Confederation of Zimbabwe Industries a major effect. 

This effect was probably more psychological since fuel bills are not that major a cost driver when actual costs are calculated. But knowing that come costs can fall can reduce over corrections.

But the falls in fuel prices would certainly have reduced pressure on the black market since so many in business and in private motoring rely on the black market for the currency they need to buy fuel, and that would have had a knock-on effect.

There were also a number of special offers in some prices at the end of last week, enhancing the advice of the Consumer Council of Zimbabwe to shop around and go for price rather than brand on many items.

In a few days time, ZimStat will start that process of gathering prices on the large basket of goods and services that they use to calculate inflation rates, with the averaging and weighting causing the delay in giving the final figure. 

But the interventions by the authorities and falling fuel prices should see the August monthly inflation rate fall again.

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