HomeBusiness DigestSAGIT - Central bank on course to rein in inflation

SAGIT – Central bank on course to rein in inflation

By Taurayi Mushambi

THE year-on-year inflation declined significantly in September to 251,5% from 314,4% in August , shedding 62,9 percentage points. The central bank appears to be on course in attaining its

200% target by December.

The decline can be attributed to the tight monetary policy and technical factors such as the high base from which inflation is coming from. As the base on which inflation is coming from declines, it poses questions of whether the two digit inflation target in 2005 and the single digit thereafter could be attained.

A lot will depend on the effectiveness of the monetary policy. Whether or not the current policy will deliver is debatable because some schools of thought would argue for a monetary policy in an unregulated environment whilst others would want extensive controls and regulations in the varying sectors of the economy although this can only be detrimental to the economy.

The graph shows annual and monthly inflation rates.

The month-on-month inflation rate, which measures the change in prices between consecutive months, was at 5,9% in September up 0,6% percentage points on the August rate of 5,3%. This means that prices increased by an average 5,9% from August to September.

This change in average price of the basket between August and September (5,9%) was lower than the change in the average price of the same basket from August to September 2003 (24,8%). This explains the fall in the year-on-year inflation in September this year.

Annual food inflation fell to 264,8% in September from 320% in August. Month-on-month food inflation increased to 6,5% from 3,1% in August. With good rains expected, we anticipate a long-term decline in annual and month-on-month inflation which should see a significant reduction in year-on-year inflation as food has the highest weighting in the CPI inflation measure.

Inflation in all non-food categories declined except for medical care which increased from 435,2% in August to 493,2% in September due to a sharp rise in monthly inflation which was at 46,6% in September up from 15,5% in August, but it has little impact on overall inflation because of its low weighting of 1,7%.

Whether or not the post-2004 inflation rate targets can be attained hinges on the effectiveness of the monetary policy and the fiscal discipline of the government which should avoid incurring unnecessary unproductive expenditure which increases money supply, thus inducing inflationary pressures in both the short and long-term.

The exchange rate is another area of concern. Whether or not to continue managing the auction rate is also debatable. On the one hand, the central bank would be pro managing the rate by not devaluing it because the overvalued rate has contributed to the declining inflation rate. On the other hand, this has negative effects on exporting companies.

By not devaluing, the returns of exporters are eroded since their revenue is not inflation-adjusted while their costs are catch-up costs.

Since companies have stopped dealing on the parallel market because of the legal consequences of doing so, some might be forced to scale down their operations or close down as was the case with Avery Berkel.

This is not good for a country on its recovery path needing to increase its productive capacity and output – especially export – to generate the much-needed foreign currency whose shortage is arguably the number one enemy rather than inflation. It might seem that letting market forces determine the exchange rate might be a better policy which would channel more foreign currency onto the official market though in the short-run this would increase the inflation rate.

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