Why the decline in inflation does not necessarily mean a decline in prices


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“Despite the forecast by the Reserve Bank of Zimbabwe to reduce inflation to a manageable level, what we are seeing on the ground is the reverse of that. Whilst statistics being given are indicating a downward trend, the reality is that prices of basic commodities are rising. This is confusing,” so said Comfort Muchekeza, regional manager of the Consumer Council of Zimbabwe in Matabeleland.

Muchekeza’s sentiments are shared by many. It is indeed confusing, even baffling. Inflation is going down but prices are going up.

This has driven many to dismiss the figures released by the Central Statistic Office, a government department, claiming that they are cooked up to give the impression that the country’s battered economy, which has been on a five-year slide, is improving, because nothing seems to be improving for the person on the street.

Central bank governor Gideon Gono, the architect of the current reform programme which aims to reduce inflation to below 200 percent by the end of the year and to a single digit by 2008, is emphatic. Inflation is indeed going down. But he quickly adds that a decline in inflation does not necessarily translate into a decline in prices.

Gono said when inflation started declining, all that it meant was that prices were going up, but at a lower rate. This is what boggles the consumer.

The drop in inflation has been remarkable, unbelievable, some would even say, considering the mess in which the country was. From a peak of 622.8 percent in January, it declined slightly to 602.5 percent in February, then marginally to 587.7 percent in March.

The central bank had predicted that inflation would peak at 700 percent in March. Gono said some economists had even predicted that it would increase to 1 400 percent by March and to 1 600 percent by June.

Things have been different on the ground. Inflation dropped significantly to 505 percent in April, then to 448.8 percent in May and 394.6 percent in June. This has convinced even the worst sceptics that Gono’s target of reducing inflation to 200 percent by December is achievable.

The only question that remains unanswered is what does this reduction in inflation mean to the average consumer.

Oscar Chiwira, chairman of the banking department at the National University of Science and Technology (NUST), said to understand the relationship between inflation and prices, consumers had to appreciate that inflation was generally the average increase in price levels over a period of time.

“This means that some prices will go up, while others will be going down. But at the end of the day if the average price goes down, inflation goes down,” he said.

Chiwira said that inflation in Zimbabwe was based on the consumer price index (CPI), which was based on a basket of what an average Zimbabwean required.

“A simple explanation would be like this. If the index in June 2002 was 50 and it went up to 100 in June 2003, annual inflation would have gone up by 100 percent. If the index in June 2004 rose to 150, inflation would be down to 50 percent but prices would have continued to increase,” Chiwira said.

The CPI stood at 1642.8 points in June 2002. Inflation at the time was 114.5 percent. The CPI had rocketed to 7631.4 points by June last year while inflation had shot up to 364.5 percent. It stood at 37741.4 points last month with inflation at 394.6 percent.

Chiwira said consumers were only going to reap tangible benefits of the reduction in inflation when it went down to single digit levels because prices would have stabilised and development would then be taking place.

He said the poor, unemployed and pensioners faced the greatest hardships in times of inflation, largely because they were hit where it hurt most, food.

Whilst most poor families spent up to 80 percent of their incomes on food, it accounts for only 33.6 percent of the CPI basket. Non-food items, which include beverages and tobacco; clothing and footwear; rents, rates and domestic power; furniture and household goods; medical care; transport and communication; reaction and entertainment; education; miscellaneous good and services; account for the remaining 66.4 percent.

This means if prices of basic food items go up while the cost of non-food products goes down, inflation is likely to go down. The average Zimbabwean would, however, be facing increasing hardship.

According to the Consumer Council of Zimbabwe (CCZ), a family of six – a father, mother and four children- needed $907 055 for their basic requirements in February. It needed $431 955 for basic food items and $475 100 for non-food items.

By June, the same family needed $580 310 for food and $563 200 for non-food items, making a total of $1 143 510 a month.

Chiwira said what these figures meant was that while inflation was on the decline, a consumer whose salary was below $1.1 million faced increased hardships. The situation was even worse if the consumer earned less than $600 000 a month as this was barely enough to meet basic food requirements, especially if the household consisted of six persons or more.

The CCZ basket was also quite revealing. Some of the food items whose prices had risen drastically are what is considered by the average consumer to be very basic.

As an example, the cost of 40 kg roller meal, which the family is said to require, had risen from $49 280 to $76 050, while the cost of vegetables – the poor person’s relish- had more than doubled from $58 000 to $135 000 a month.

Ironically the price of beef, which most poor households now consider a luxury, had dropped from $108 800 to $80 000 a month.

And though Gono has declared inflation enemy number one, and the government is helping fight inflation, there are some who think that governments “love inflation” because they benefit tremendously.

According to an economics website, Abelard.org: “When governments ‘borrow’ from you, they have no intention of repaying the money they have supposedly borrowed. This is much of what inflation is all about. Inflation is a trick to make you think you are being repaid money that you lend the government, when they are in fact stealing the money from you. The objective is, that the longer that you leave your money in savings, the less it will be worth.”

It adds: “As a politician once said, ‘the objective is to pluck the geese ( read poor) in such a manner as to obtain the greatest number of feathers with the least amount of hissing'”.

Zimbabwe’s domestic debt has for example, ballooned from $375 billion in May last year to a staggering $1.4 trillion by June 25 this year.

If this does not make any sense, just imagine: If you lent someone $10 000 in June last year, and he or she gave you back $10 000 today, or even $20 000, would you not feel robbed?

(88 VIEWS)

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Charles Rukuni
The Insider is a political and business bulletin about Zimbabwe, edited by Charles Rukuni. Founded in 1990, it was a printed 12-page subscription only newsletter until 2003 when Zimbabwe's hyper-inflation made it impossible to continue printing.

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