Central Statistical Office on Thursday 27th October 2016 announced a significant reduction in inflation of 6.5 percentage points that has raised more questions than answers. A drop from 18.9% in September to 12.5% in October when prices of commodities on the ground have remained high deserves explaining. There have been a number of concerns on the media and amongst the public.
Our observation like many others have observed is that the reported reduction in inflation does not indeed correspond to the current levels of cost of living. In fact Central Statistical Office has reported that prices of some commodities such as mealie meal have kept going up and so the reported reduction in inflation must have been influenced by other factors. While prices of some commodities may have reduced, it is doubtful that it could have caused such a significant reduction.
Like Central Statistical Office has intimated, the reduction in inflation has been driven by the ‘base effect’ and not so much the reduction in actual prices. The base effect is defined as the consequence of abnormally high or low levels of inflation in a previous month distorting the headline inflation numbers for the most recent month.
Looking at 2015 October inflation increased from 7.7% to 14.3%, at the same period the JCTR’s BNB for Lusaka passed the K4,000 barrier for the first time from K3,957.46 to K4,249.56. Such a shock is what is being referred to in the base effect definition.
Since inflation is calculated as a difference between the same month in the current year and that of previous year, the differences before this month of October have been relatively higher – causing inflation to be higher.
But from October we expect the differences to be lower since this is the point at which inflation drastically rose in 2015 and we have since been having prices that are around the same range. To illustrate this numerically we look at the BNB figures from last year and compare them to this year (giving an estimate for October BNB since BNB data for the month of October has not yet been analyzed).
Note: Inflation here is calculated with BNB figures for Lusaka as opposed to nationwide figures as done by the CSO for illustration purposes only.
Thus, the reduction in the October inflation is not necessarily a result of actual prices of goods and services reducing but because we are now calculating inflation over the period when it has been significantly high and therefore, similar to current prices. In other words, the rate of change of prices between October 2015 and October 2016 has reduced even though the cost of living remains high. It should also be noted that the recent increase in the cost of fuel has not been captured in the October inflation statistics but will surely be reflected in the November inflation statics. This is due to the time lag of pass through effects on fuel price adjustment.
The JCTR thus urges government and the Central Statistical Office to adequately explain these facts to the common man to avoid misinformation and the credibility of the CSO coming into question. Further, the Centre, calls on government to in its economic recovery plan to critically address the adverse effects of subsidy removal on the poor and work using the saved funds transparently in a manner that will benefit the poor and the nation as a whole.
For more information, contact the Social and Economic Development Programme of
The Jesuit Centre for Theological Reflection, P.O. Box 37774, 10101 Lusaka, Zambia
Tel: 260-211-290-410 Fax: 260-211-290-759 E-mail: [email protected] Webster: www.jctr.org.zm
Or www.openbudgetsurvey.org, Location: 3813 Martin Mwamba Road, Olympia Park, Lusaka