HomeBusiness DigestTetrad - January inflation a bit unnerving

Tetrad – January inflation a bit unnerving

By Admire Mavolwane

THE country’s “number one enemy” could be showing the same resilience that Zimbabweans are well known for, if the latest CPI figures are anything to

go by.

The January inflation rate numbers as provided by the Central Statistical Office show a year-on-year increase of 133,6% and a month-on-month rise of 14,1%. This is the first time the annual figure has increased since February 2004 and what is even more frightening is the fact that the month-on-month figure surpassed last year’s peak of 10,1%, probably showing that the “enemy” although down is not yet out.

The annual figure reflects an advancement of 0,9 percentage points on the December figure, attributed mainly to the increase in food prices, accounting for 41,7 percentage points with non-food items weighing in with 91,8 percentage points. The surge in month-on-month inflation was blamed on the increase in the average prices of ‘beverages”, “rent and rates”, “education fees”, “communication” and “meat”. As can be expected goods and services supplied by quasi monopolies show the highest increases.

In January, communication costs rose by 2 063,8% year-on-year and by 21,0% on the December figure. Prices of beverages went up by 16,8% for the month while school fees, as anticipated, at 125,4% reflect an increase of over 100% after the schools were given the green light to double fees.

What is a bit puzzling is that such increases, especially in the communications sector, are not accompanied by an improvement in the quality of service provision but rather by a deterioration. Not only is sending a letter or parcel by post very expensive but is also very risky. Resultantly many companies have now resorted to using courier services rather than take chances. Telecommunication services, both fixed and mobile, are no better, with the latter suffering from intolerable congestion.

In the past couple of years the publication of inflation figures has been met with mixed feelings and sometimes outright disbelief. Individual experience of inflation is remarkably different from that implied by the official figures. This is not a deliberate mistake on the part of the authorities but reflects the problem encountered in the use of index numbers over time.

The inflation rate in this country, as with other countries is measured using the consumer price index (CPI), which in essence is a Laspeyres price index. It measures the changing cost of purchasing a fixed basket of goods and services which represents the average household expenditure pattern. Base year quantities purchased are used as weights.

The latter assumption, of a fixed basket with fixed quantities is where the fundamental problem lies and brings out all sorts of emotions and heated debates. By taking quantity as a constant, the CPI fails to capture the change in consumption patterns as well as the substitution effect over time. To counter this flaw, reviews of the basket would need to be conducted regularly, ideally every five years in low inflation economies and three years in hyper inflation economies.

Zimbabwe has undergone a very difficult period in which the standard of living, consumption patterns as well as the purchasing power of the currency has been adversely affected. The three-tier stratification into lower, middle and upper class is increasing turning into a dichotomous one as the middle class is disappearing. In most instances members of the latter have slid into the lower class. Former middle class members’ personal experience of inflation may be different from what the CSO figures would seem to suggest, as they have had to change their consumption patterns.

Another problematic area, which results in emotional disbelief, is the make-up of the basket, what to include and in what quantities. This ultimately affects the weightings in the basket.

Distortions brought about by geographical, religious, social and cultural differences also affect the compilation and ultimately the conclusions drawn from the CPI. Those who do not partake of the merry waters, those who do not seek medical attention and vegetarians would have relatively different inflation experiences to those who do.

Price rises as well as consumption patterns in the rural areas are remarkably different from cities. The incredible rise in communications costs cited earlier, would probably affect the urban dweller, who is inclined to complain about its weight of 0,3 than the rural-based citizen.

Even across cities differences emerge, with goods and services in Victoria Falls and other tourist areas being more expensive than in other areas. In South Africa, in order to cater for these differences, two CPI indices are calculated; one for major cities (metropolitan CPI) and the other for all areas that include rural towns. Maybe consideration could be given to coming up with such figures?

Infrequent revision of the basket reduces the credibility of the CPI as it falls short of capturing the changes in quality. This is quite often the case with electronic goods like computers, cell phone handsets and household appliances. In other words a substitution effect takes place as quality improves. New products that enter the market are not captured, such that as more and more new products become central to the peoples lives, the impact of price changes in these products would not be reflected.

The current local CPI weightings were established in 1995, when the basket was last revised. The shift in consumption induced by the hyperinflationary conditions has evidently not been captured in the inflation rate, thus making the figures somehow unrepresentative. For example, it is not clear whether the enumeration of figures for clothing and footwear includes the flea markets and the imported products.

There is also a growing body of evidence showing the disparity and increasing divergence between official CPI figures and independent professional surveys. For example, by comparison with the 133% year-on-year rise indicated in the December 2004 CPI, a number of independent surveys give the annual increase in prices as between 173% and 261% for all three income classes. In addition, take the case of vehicle running costs, the 12-month rise indicated in the CPI is 59,4% for January 2005 whereas the Automobile Association’s figures show a 122,8% rise.

It is obviously debatable as to what extent the CPI is understating or overstating the true rate of inflation but what is indisputable is the fact that the figure which was 622,8% in January 2004 is now 133,6% as it has been, presumably, consistently measured. However, the CPI as currently measured is showing signs of re-accelerating and the surge in the latest month-on-month rate poses a serious threat to the RBZ’s inflation rate target of between 20% and 35% by December 2005. For the target to be achieved, it would mean that the monthly inflation would have to average 1, 25% for the remaining eleven months which is a tall order indeed!

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