Inflation decline unsustainable — Analysts

ZIMBABWE’S inflation rate trended downwards in June and July 2012, making the country one of the low inflation economies in the sub-Saharan region, but some analysts doubt the sustainability of the trend and the accuracy of the country’s inflation statistics.

Report by Clive Mphambela

According to the national statistics agency, Zimstat, Zimbabwe’s year-on-year inflation rate has taken another consecutive 0,03% dip to 3,94% in the year to July 2012, after having fallen 0,6% to 3,97% in June from 4,03% in May.
The Consumer Price Index (CPI) for the month ending July 2012 stood at 102,07 compared to 101,84 in June 2012 and 98,20 in July 2011.
The drop essentially means that prices as measured by the CPI increased by an average of 3,94 % as of July 2011 and July 2012.
The year-on-year inflation rate is given by the percentage change in the index of the relevant month of the current year compared with the index of the same month the previous year.
The year-on-year food and non-alcoholic beverages inflation, which is prone to transitory shocks, was at 4,29 %, whilst non-food inflation stood at 3,79%.
However, on a month-on-month basis, the inflation rate in July 2012 was 0,23%, representing a 0,03 % increase on the June 2012 rate of 0,20%.
This means that prices as measured by the all-items CPI increased at an average of 0,23% from June 2012 to July 2012.
The month-on-month inflation rate is given by the percentage change in the index of the relevant month of the current year compared to the index of the previous month in the current year.
The month-on-month food and non-alcoholic beverages inflation stood at minus 0,02% in July 2012 shedding 0,31% on the June 2012 rate of 0,29%. The month-on-month non-food inflation stood at 0,34%, gaining 0,18 percentage points on the June 2012 rate of 0,16%.
Economic analyst Eric Bloch says the direction of inflation decline is sustainable and should continue to trend downwards.
“However, it is no longer a true reflection of inflation fundamentals. The CPI weightings are no longer consistent with current consumer spending patterns.Real inflation is somewhat higher than is presently being recorded as consumers are spending relatively more on things like communication, food, transport and accommodation, education and health leaving very little to go towards, hotels, restaurants, clothing and footwear, which are presently being accorded relatively higher weightings than they should have in the CPI,” Bloch said.
Chartered financial analyst and MMC Capital head of research, Itai Chirume said whilst Zimbabwe’s inflation was not trending downwards, the decline might not be sustainable.
“There is a risk that whilst inflation seems to be slowing down, the trend will sharply reverse given the fact that Zimbabwe this year will remain a heavy food importer, particularly in the second half of the year,” he said.
“The major retailers will still need to stock up 70 to 80% of their shelf space with imported items as the manufacturing sector continues to falter and we have no capacity to offset increased import demand in the second half of the year. This means that should the rand start to firm up towards the end of the year as the problems in Europe start to wane and the euro starts to recover, we may see prices locally firm up significantly, driven by a strengthening rand. This form of imported inflation will also be bolstered  by firming global oil prices as the euro zone starts to steady up and the euro strengthens and oil demand start to increase, putting pressure on crude oil prices,” Chirume said.
He argued that there were strong expectations of central banks in Europe doing further rounds of quantitative easing and the injection of liquidity has contributed to the recent firming in global oil prices — a trend which was likely to continue. The situation was made worse by the deepening Middle East crisis and generally falling US crude stockpiles, which were pushing up oil demand.
“These two factors remain high risk indicators and pose significant upside inflation risk on the economy,” Chirume said.
However, Pan African banking group ABC Holdings (ABCH) says Zimbabwe’s inflation rate remains one of the lowest in the region. At an average of 4,1% inflation to June 2012, Zimbabwe’s rate only comes second to Mozambique’s average inflation rate of 2,7%.

The data from ABCH shows that Tanzania has the highest average inflation rate of 18,7% for the six months to June 2012, whilst Botswana rates have averaged 7,9%. Zambia and South Africa have had average rates of 6,4% and 6,0% respectively.Apart from Zambia, whose inflation is trending upwards, the rest of sub-Saharan countries have been recording sustained decline in domestic rates of inflation.

Zimbabwe’s economy has since stabilised over the last three years after a decade-long downturn which saw runaway hyperinflation reaching an official peak of 231 million percent after which the authorities failed to keep count.