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Inflation – no deflation here: price increases

By Addmore Chakurira

LAST week, the Central Statistical Office (CSO) released the June 2004 inflation figures.


Hea

dline inflation has continued its decline from a high of 622,8% in January to 448,8% in May, and then to 394,6% in June.


This can be attributed to a tight monetary policy, depressed demand and prices coming off a higher base.


Of the 394,6% year-on-year rate of inflation, food inflation accounted for 430,6% (down 51,2 percentage points on the May rate) and core inflation 373% (slowing by 56,8 percentage points on the May rate).


The 430,6% was mainly attributable to increases in bread and cereals (723,1%), condiments and confectionery (509,5%), meat (437,7%), and fruit and vegetables (332,5%).


However, month-on-month headline inflation, which has been on a downward slide since January, jumped from 6% in May to 9,2% in June.

Notable increases were recorded in bread and cereals, fruit and vegetables, meat, beverages and public transport. The figures released do not factor in the recent increases of soft drinks, postage rates and telephone charges.


Lies, damn lies and statistics?


There has been considerable debate on the accuracy of the reported official figures, with some believing that the figures are stage-managed.

It needs to be noted that inflation is an increase in the overall average level of prices (of consumer goods and services) and not in an increase in the price of any specific product, measured using the Consumer Price Index (CPI).


The CSO uses the Income, Consumption and Expenditure Survey (ICES) to determine a representative bundle of goods and services purchased by a typical household. The survey is carried once after every five years, thus fixing the basket of goods and services allowing only the prices to change.


The CPI measures the cost of purchasing a market basket of goods and services by a typical household during a time period relative to the cost of the same bundle during a base year; currently the base year is 1995. Results of the latest ICES done in 2000 are not yet out due to resources constraints.


The CSO records average prices for a “market basket” of different items purchased by the typical family, on a monthly basis. Price collectors contact retail stores, homeowners, and tenants in the 10 provinces around the country. The weights, which are used to calculate the index, are based on the pattern of household expenditure derived from the ICES. Because the market basket and the weights are not revised often enough, they might not be reflective of the current situation especially in this hyperinflation environment.


The CPI only covers a portion of the economy and distortions are inherent due to the current discrepancies in the economy (wide gap between the haves and have-nots). With the data collection problems the CPI can understate the impact of inflation for certain groups. During the price control era (late 2002 to early 2003) only official prices were used for calculating the CPI, even when the goods were not available on the shelves.


There is also a considerable time lag in collecting the actual data, eg. school fees, are generally collected twice a year. With greater stability in the consumption basket’s composition, measures of the CPI make more sense. That said, some of the data problems are truly insoluble, and we have numbers, which are more or less useful but in no sense precise measures as a result of technical issues as opposed to a desire to misrepresent facts.


Real incomes under siege


Of late real incomes have been dwindling as the rate of inflation has been greater than the rate of income. For example a nominal income of say $1 million in 2002 would equate to some $3 000 after adjusting for inflation.

The volatile food inflation indicator has spiked up exerting a lot of pressure on wages. The current wage and salary adjustments might result in a wage spiral as companies try to remain afloat to the detriment of inflation and the economy as a whole.


Business can also contribute to cost-push inflation by raising prices to increase profits especially the monopolies and/or oligopolies. Because the current tax system set rates on nominal income, people are paying higher marginal tax rates.


The tax the government imposes on nominal interest on investments creates another cost of inflation for savers. The authorities should consider changing the tax system to index income for inflation. This means that the income level at which higher marginal tax rates apply floats upward based on inflation rates.


The indexation might eliminate bracket creep. This will help in keeping demand at acceptable levels to the benefit of industry, which is faced with reduced demand and is operating below capacity. Productivity, which is a key variable to economic recovery, is hard hit by depressed local demand.

The markets and the populace at large eagerly await a review of the tax system.


Inflation remains high


The paintbrush strokes on producer and consumer prices continue skyrocketing. Inflationary pressures still exist in the form of a weak local currency, rising world oil prices, spiraling local costs, shortage of power in the region and high money supply. That said, inflation is generally expected to ease in the long run aided by the reduction in inflation psychosis, depressed demand and a tight monetary policy.


However, the months of July/August might steal momentum from the inflation slowdown as inflation might spike up due to the recent price hikes.


DISCLAIMER


Information contained herein has been derived from sources believed to be reliable but is not guaranteed as to its accuracy and does not purport to be a complete analysis of the security, company or industry involved. Any opinions expressed reflect the current judgement of the authors, and do not necessarily reflect the opinion of Sagit Financial Holdings (Pvt) Ltd or any of its subsidiaries and affiliates. The opinions presented are subject to change without notice. Neither Sagit Financial Holdings nor its subsidiaries/affiliates accept any responsibility for liabilities arising from use of this article or its contents.

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