HomeEconomyZim inflation is understated

Zim inflation is understated

The Brett Chulu

OUR inflation, whether month-on-month or year-on-year, is understated. It seems to be more of a case of tradition — I cannot rule out a case of convenience to paint a better picture based on relying on one set of inflation series, ignoring the other.

Analysts should also take responsibility for allowing this to happen, making the nation sup on one-sided inflation statistics that, by default, show a rosier picture than warranted.

Surprisingly, the data that we need to decipher the more accurate inflation figure is available. The reason the more accurate inflation figure is not brought into the public economic discourse is that there seems to be an analytic blind-spot habituating many to focus exclusively on the consumer price index (CPI) as the basis for calculating inflation. There are two ways of determining inflation: the CPI route or the gross domestic product (GDP) deflator route. The CPI is not the inflation figure, neither is the GDP deflator — these two are indices that measure movement in prices from a base year.

The percentage movement of either the CPI or the GDP deflator between two successive periods is the inflation. Fortunately, ZimStat periodically publishes GDP deflators, helping us to compare the CPI-anchored inflation with the GDP deflator-linked inflation. The GDP deflator-linked inflation is more accurate than the CPI-linked inflation for a simple reason: GDP deflators are based on all goods and services our statisticians use to calculate our GDP, whereas the CPI is based on a very narrow sample of goods and services for consumers.

An analysis of GDP deflators and CPIs supplied by ZimStat (with 2009 as the base year) from 2009 to 2017 reveals that there is a significant gap between the GDP deflator-determined inflation and the CPI-anchored inflation. Four salient points arise from the analysis of the trends of the two inflation series.
First, the CPI-determined inflation is almost always lower than the GDP deflator-based inflation. From 2009 to 2017, the inflation based on the GDP deflator, which I will refer to as the economy-wide inflation, was higher than the CPI-linked inflation, the one that is customarily published in Zimbabwe (which I will refer to as the reported inflation), except for the year 2012.

In 2010, the economy-wide inflation was 22% higher than the reported inflation. This is quite significant. In 2011, the economy-wide inflation was 13,8% higher than the reported inflation. In 2012, the reported inflation was 69% higher than the economy-wide inflation. In 2013, the economy-wide inflation was 163% higher than the reported inflation, seemingly, a correction of the anomaly of the previous year.

In 2014, the economy-wide inflation was 6,57 times higher than the reported inflation. In 2015, the economy-wide inflation was 2,49 times higher than the reported inflation. In 2016, the economy-wide inflation was 4,88 times higher than the reported inflation. In 2017, the year of the coup, the economy-wide inflation was 1,94 times higher than the reported inflation. It is clear that as a nation, through the exclusive use of the CPI, we almost always understate the economy-wide inflation.

The second insight centres on the years 2014 to 2016. In this period, the CPI methodology recorded deflation. The economy-wide picture, ironically, for 2014 and 2016 registered inflation, not deflation. It is only in 2015 where both the CPI and GDP deflators implied deflation. Even with both approaches registering deflation for 2015, the CPI overstated the deflation for the year by a whopping 2,54 times more.

Of even greater importance is that in the year the bond notes were introduced, the CPI reflected that we were still in deflation — which does not make sense, given that the central bank at that point in time was intensifying its helicopter money activities (un-backed money printing). Fortunately, the GDP deflators correctly picked that we were inflating—the disparity was very huge, at 4,88 times more.

Third, the inflation-stabilisation policy performance between the Government of National Unity (GNU) and post-GNU divide tells a clear story.During the GNU period, the disparity between the reported inflation and the economy-wide inflation was significantly less (below 1x) than that recorded during the post-GNU era.

The economy-wide inflation during the post-GNU period has been significantly higher than the reported inflation figures, ranging from 1,63 times to 6,57 times more. If we had been tracking the economy-wide inflation more deliberately, we would have easily picked the signs that our economic management was deteriorating faster than the conventional statistics were showing.

Fourth, there are implications for the current period. What has the trend from 2009 to 2017 have to do with what is obtaining now? The gap in data we have is for 2018 and 2019. From the trend, it is almost certain that our current reported inflation is much lower than the economy-wide inflation. The point is that the rate at which the purchasing power of money is eroding is much higher than reported inflation figures seem to suggest.

On a more significant level, any reports of declining inflation, based on CPI, are incomplete as they show us only a very narrow picture of the economy, based on a technical basket of goods and services and not what is obtaining in the entire economy. In any case, the CPI basket is a technical convenience meant to make inflation calculations relatively easy. That CPI basket, in the real Zimbabwean situation, does not represent the consumption mix of the majority of people — each household has a different basket owing to its peculiar circumstances, more so in a trying economic environment such as ours.

Worse still, the CPI is methodologically of little relevance to producers whose individual input baskets are different from that of a general consumer — the more relevant price index for them is the GDP deflator, hence the more relevant inflation is the one based on comparing GDP deflators. This logically leads us to the hyper-inflationary accounting. International Accounting Standard (IAS) 29 requires companies, more importantly those listed on the Zimbabwe Stock Exchange, to publish inflation-adjusted financial statements as Zimbabwe is considered to have met the conditions for invoking IAS 29.

What the inflation data companies are using is based on the CPI. The CPI data for Zimbabwe as has been shown almost always give inflation that is lower than that calculated from the GDP deflator. This means that in real terms the profits and assets published in financial statements are significantly overstated and any recorded losses are significantly understated. Any investor, analyst or even the public have to approach any reports of either profit or loss with a large dose of scepticism—they should further discount any profits and inflate any losses.

In terms of our monetary policy statements and the national budget, comparisons of financial and/or monetary data between periods should also be inflation-adjusted—this has not been happening, rendering the comparative figures technically and logically meaningless. If our monetary and fiscal authorities do the right thing and furnish us with inflation-adjusted comparative figures, they should give us two comparative figures: one based on the CPI and another based on the GDP deflator.

We need to know accurately how well we are or how sick we are.

Chulu is a management consultant and a classic grounded theory researcher who has published research in an academic peer-reviewed international journal. — brettchuluconsultant@gmail.com.

Recent Posts

Stories you will enjoy

Recommended reading