Inflation is one of the most economic terms widely used in the media, public discussions and political speeches.
Politicians, both on the opposition and the governing sides, use inflation rate to advance their agenda, especially economic management. High inflation rate is fodder for the opposition who use it to stress that the government is “failing” to ease the cost of living while government uses low inflation rate to emphasise that “the economy is on track”.
National Statistical Office (NSO) data shows that Malawi’s December 2017 inflation rate, as measured by the Consumer Price Index (CPI), dropped to 7.1 percent from 7.7 percent in November.
In his numerous addresses, President Peter Mutharika highlights the single-digit inflation rate among his administration’s achievements in terms of economic management.
In August 2017, Malawi’s inflation rate hit the single-digit mark at 9.3 percent for the first time since December 2011. The achievement came ahead of the December 2017 target of the Reserve Bank of Malawi (RBM) due to easing prices of food, particularly maize which has a huge weight of 50.1 percent in the CPI—the aggregate basket of commodities NSO uses to measure the price level of consumer goods and services purchased by households.
Why the fuss about the inflation rate? Why are prices of goods and services still on the rise when inflation rate is on the downward spiral? Why should people care about inflation rate anyway? These are some of the questions many people have been asking in the wake of the excitement about the inflation statistics, most notably among the politicians in the ruling camp.
It is worth appreciating that it is much easier for prices to go up than down. Economists say prices tend to be “sticky” going downwards. It is more like the biblical imagery of being easier for a camel to go through the eye of a needle than it is for a rich man to enter the kingdom of God.
How does inflation work? To appreciate how inflation works and why it matters, there is need to get what it means.
Technically, inflation refers to the rate of the general rise or movement in prices of goods and services consumed in an economy. It is also defined as a general and sustained rise in the level of prices of goods and services.
Worth marking is “the rate of movement in prices”.
When inflation is going down, as is the case in the country, it does not necessarily follow that prices of goods and services should be going down. Inflation rate on the downward spiral means prices of goods and services are still rising, but at a slower or lower pace than when inflation is on the rise.
Inflation rate works in the same way as a motorist driving from point A to B at different speeds yet the vehicle is still in motion and consuming fuel. Where the motorists drive at a higher speed, the consumption of fuel and speed increases.
The other day, one economist suggested that to convey the message on inflation rate changes to the masses,z the changes should be presented like this: “Mu mwezi wa August chaka chino mitengo ya katundu inakwera ndi K9 pa K100 iliyonse poyerekeza ndi [August] chaka chatha pomwe inakwera ndi K22.80 pa K100.”
Inflation is more than figures or the single-digit, double-digit and even triple-digit. The inflation rate is arrived at by calculating the percentage price increase in goods and services over a given period. The period usually covers a month or indeed a year.
To compute inflation, prices of selected goods and services consumed in an economy are captured, added together or combined to come up with an average price technically called a price index. The price index is in turn built from the selection of goods and services, notably the CPI.
Now that single-digit inflation rate has been achieved, and so far sustained since August, the key challenge remains in sustaining the same.
Stable inflation is one critical factor of macroeconomic fundamentals. It helps both individuals and businesses to make long-term plans. It is a factor towards an improved business environment alongside lower real interest rates. n