EDITORIAL COMMENT : New inflation calculation more accurate of what’s happening

Inflation is now tamed, regardless of what currency you use, with the new weighted consumer price index results actually producing negative inflation, that is a fall in prices, between January and last month.

That fall of 1,6 percent could only have been possible with a fall in US dollar prices and at least something close to zero change in local currency prices, and probably even a fall in local currency prices.

Zimbabwe dollar pricing at present accounts for around 30 percent of transactions, so a three percent rise in Zimbabwe dollar prices would correspond to a 1 percent rise in monthly inflation.

We saw this in January where with all prices reduced to Zimbabwe dollars monthly inflation was just 1,1 percent. The weighted average once US dollar transactions are calculated separately came to 0,7 percent, so the local currency inflation has a noted effect on the final weighted or blended average.

The new system does not hide price rises, and cannot be used to hide price rises, but it does take into account the currency used.

One of the strangest facts from that 1,6 percent fall in prices is that inflation in America is at its highest level for some years, running at more than 6 percent a year, and yet in Zimbabwe US dollar prices must be falling.

This strongly suggests that some of the pricing in Zimbabwe goes way beyond just taking the cost of something, adding a standard mark-up and giving a final retail price.

It is fairly obvious that during the inflation spike last year some people were also pushing up US dollar prices, to cover potential problems from the falling value of Zimbabwe dollars or simply to profiteer.

There was also the rather despicable double conversion by some traders, who started with a US dollar price, converted to a Zimbabwe dollar price at the black market rate and then converted back to US dollars at the official rate and set this as the retail price.

This allowed them to obey the law in theory, so the final price could be converted for those opting to pay in Zimbabwe dollars at the official rate on paper but the actual conversion because of that double step was at the black market rate in practice.

Sometimes some Zimbabwean business people show innovation in currency dealing at a level that would be better applied both for their own businesses, their customers and the country at large by working out new products to sell at fair prices.

This double currency conversion must have been happening and the reforms and programmes to tame the black market, and at the same time slash the premium charged by the black market on the official rate, would have also worked to make the profiteering in that sort of double currency conversion much lower.

So the market led reforms of last year, the pushing up of interest rates into effective positive levels, so that borrowing for speculation immediately because a way to lose money, and then cutting demand for the black market foreign currency by offering the honest business majority the opportunity to buy gold coins if they needed to maintain      value.

At the same time the introduction of an effective interbank rate and aligning this with the weighted average on the auctions produced a market-driven exchange rate, and then with the black market premium so low allowing retailers that 10 percent premium on the interbank rate meant that most holders of foreign currency were ready to use it to buy retail, instead of changing their money first with a black market dealer.

That in turn allowed most in the retail trade to use what they collected at their own tills for foreign currency for imports, rather than go to the auction, which in turn saw auction demand fall.

The auction demand was already falling fast as Zimbabwe farmers were producing so much more, thanks to Government programmes, so food imports which had been major auction items were dramatically reduced.

The cutting out of the black market stage from so many commercial transactions was what raised the level of direct US dollar transactions to 70 percent, so everyone wins except the black market dealers whose business has been hammered, but they are the only ones in tears.

When you get things right everything else goes right, including it seems the cost of living as prices fall.

Some may query the use of the weighted average of national transactions in two currencies in setting the official inflation rate on the grounds that few people split their spending 70-30 between currencies.

On the other hand it does produce the realistic national figure based on average spending, however, we use currencies to calculate inflation, we are still starting from a set of averages generated by a detailed survey made by ZimStat on how once again an average family spends its money.

ZimStat start with how an adequate sample of urban families budget and spend over a month, having to use urban families because even a modest small-scale farmer will grow or raise most of their own food.

But this average household is just a set of numbers, rather than a real family of 4,2 people living in a house or flat of 2,7 bedrooms and buying a quarter shoe and half a shirt each month. Averages are just that, averages, but we all fit into the range at some point, but it is dubious if anyone fits in at the exact average point.

So we get a lot of useful information, and even the weighting for each item tells us a lot about society.

For example the average of 31,3 percent of household income spent on food tells us that Zimbabweans are not that rich yet since poorer people tend to spend a higher proportion than the rich on food, even taking into account all the extra luxuries in a Borrowdale mansion.

The Reserve Bank of Zimbabwe, backed by the Government’s finance experts, are looking for the most meaningful numbers to measure the total economy.

We can all delve into the actual numbers and keep super accurate household accounts to work out our private inflation rates, but when we want to see how the economy works we need the totals and the averages.

And that is what the new calculation method for inflation does, a double average if you like, but it gives the most useful information about us all, even when we all differ.

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