HomeBusiness DigestWhy are prices not decreasing?

Why are prices not decreasing?

‘Price Stickiness’ is a concept popular in economic circles and used to describe the resistance of a price to change despite changes in other economic fundamentals that suggest a different price is realistic.

Kumbirai Makwembere

Prices are described as ‘sticky on the downside’ when they hold up at a time when the costs of other factors of production are coming off.

However, they are also described as ‘Sticky on the upside’ when they sometime fail to respond to a slight upward change in variables.

This concept of prices being sticky on the downside can be used to best describe how prices are behaving locally when linked to inflation trends.

Zimstats recently announced that Zimbabwe’s year- on-year inflation in June slowed down to 1,87% shedding 0,33 percentage points on the May 2013 rate of 2,2%.

Simply put, basing on the Consumer Price Index (CPI) figures the weighted cost of goods and services locally shed 1,87% between June 2012 and June 2013.

The month-on-month inflation rate in June 2013 was -0,13% gaining 0,08 percentage points on the May’s figure of -0,21%.

Inflation has been on a downward trend since the beginning of the year.

Year on year inflation stood at 2,91% in December 31 2012.

There are several reasons for the decline in CPI figures chief amongst them being the softening trend in the South African Rand since the beginning of the year as the country imports close to 60% of its products from across the Limpopo.

The depreciation of the South African currency is a result of the unending job disputes in their mining sector, particularly among platinum producers, and this has resulted in output declining.

Again, demand for platinum has also been on a decline owing to the technological advances in the production of catalytic converters as they now require less platinum and palladium.

In addition production of vehicles has been falling especially in the European Union. This has in turn reduced the amount of exports from South Africa.

The protracted recession in the Euro Zone has also had a negative impact on the Rand since the European Union absorbs most of the exports from South Africa.

Another contributing factor to the decline in inflation figures has been the subdued demand locally due to tighter liquidity. Disposable incomes remain low and this has forced both individuals and corporates to reorient their spending priorities.

Another reason why prices have been sticky could relate to the assertion that South African exporters are increasingly invoicing their goods in US dollar terms.

This has been done so as to eliminate or reduce the currency risk exposure.

Some executives in the retail business have concurred with this assertion which somehow explains why prices are sticky downwards.

Ideally, the trends in inflation should be felt in the day to day life of an ordinary Zimbabwean. If inflation is going down, as Zimstats claims, prices should also come off and vice-versa.

This however has not been the case as the cost of living has in actual fact gone up over the past 12 months. According to the Consumer Council of Zimbabwe the cost of living increased by 0,54% to US$564,73 in the month of June from US$561,73 in May.

Therefore, why are prices not coming off when CPI figures have been declining? What therefore could be the reason for the disparity? Could it be that the CPI figures compiled by Zimstats are wrong?

Market players have in many instances argued that the CPI basket is outdated and as a result does not give a true reflection of trends in consumed prices.

The majority of Zimbabweans live from hand to mouth with food, accommodation, transport and school fees accounting for close to 90% of their incomes. These basics have gone up significantly over the past year but inflation figures have not responded accordingly.

The importance of CPI figures cannot be over emphasised as they are being used as a benchmark in many circles.

Examples include the wage negotiations whilst in corporate circles executives use inflation figures as a measure of how well their companies will be performing. These inflation figures are again used for planning purposes.

It is therefore important to put measures in place that ensure that any statistics gathered in the country are accurate so that they can be useful.

CPI figures are not the only figures that are disputed by many in Zimbabwe. Other examples that readily come to mind include nominal Growth Domestic Product (GDP) figures. The country’s GDP for 2012 is estimated at US$9,80 billion according to the IMF report on Zimbabwe. Is this believable considering that Zambia has a GDP of US$20,7 billion, Botswana US$14,41 billion, Mozambique US$14,3 billion and Malawi US$4,3 billion.

Well for GDP it is understandable as the economy is now informal to a larger extent and as such collecting data from the sector is difficult. Bankers on the other hand strongly believe that the amount of deposits circulating outside the banking system now stands at US$4 billion.

The million dollar question is where is the money? What is the population of Zimbabwe? All these are examples of statistics that are disputed but should be readily available.

It would appear that the challenge we have as a country is on coming up with such key figures or statistics.

There are many occasions where authorities have had to revise down their growth projections. For instance, in 2012 government had initially projected GDP growth to expand by 9,4% before revising the figure to 5,6% on presenting the midterm fiscal policy. However, overall the economy is believed to have grown by only 4,4% in 2012.

Recent Posts

Stories you will enjoy

Recommended reading