By Farai Makumbe
HAS the Central Statistics Office changed the way they measure the rate of inflation as there appears to be a growing disconnect between the cost of liv
ing and official statistics?
Personal incomes have stagnated and are failing to keep pace with the rise in the cost of living while the media appears to be treating price increases as non-events.
What is the impact of this?
Annual salary increment negotiations between employee committees and management begin with Consumer Price Index (CPI) adjustments. How many employees are falling further behind in their earnings because of an understated CPI?
How many landlords are cheated out of competitive rental income by understated inflation rates?
Air Zimbabwe is making phenomenal losses due to the fact that they are pricing their services below market costs.
This is a perfect example of why any business needs to price its products/services after taking into account realistic economic data.
An understated CPI also overstates the gross domestic product of the country by not removing the full inflationary impact of pricing from nominal numbers. Any debate on inflation must begin with the truth.
By pointing to an understated CPI as proof that inflationary forces are under control or stabilising is disingenuous at best and fraudulent at its worst.
One of the main drivers of hyperinflation in Zimbabwe, I think, is the extreme rapid growth in the supply of “paper” money through the monetary and fiscal authorities regularly issuing large quantities to pay for a large stream of government expenditures.
I mention both institutions here as there is currently a lack of clarity of responsibility in the aftermath of the central bank governor’s admission to engaging in quasi-fiscal/monetary policies. In effect, inflation has become a form of taxation where the government is gaining at the expense of those who hold money whose value is declining.
Hyperinflation being experienced here is therefore a very large taxation scheme in another form.
Zimbabwe’s hyperinflation, like all hyperinflation situations, is self-perpetuating.
The government is realising that it can no longer buy as much with the money it is issuing and is responding by raising money growth even further. The hyperinflation cycle begun this way, triggering a tug-of-war between the public and government.
The public will naturally try to spend the money it receives quickly in order to avoid the inflation tax while the government responds with even higher rates of money issue. How will this hyperinflation end?
The standard answer is that the government will need to make a credible commitment to halting the rapid growth in the supply of money.
* Farai Makumbe is a financial analyst based in Los Angeles, USA.