As the economy begins to show evidence of improvements, the so-called green shoots, expectations still play a pivotal role in the planning matrices of economic agents.
The last two months have seen stability in many aspects of the economy and epitomised by a stable currency, declining inflation on the traditional basket, an improving balance of payment position, growing exports and stable imports.
Of all these indicators, however, inflation attracts the most attention of economic agents as it is directly observable by all members of society.
It is one fundamental that the authorities need to manage well in order to gain more traction in the building of market confidence. This explains the reasons why for 2019, the Ministry of Finance and Economic Development took the decision to suspend the publication of annual inflation figures as that was only fuelling negative expectations.
The ensuing developments during the rest of that year going into 2020, followed by the re-introduction of the US dollar as legal tender for local transactions pauses questions on the way the country’s inflation statistics should be compiled.
It is therefore considered correct for the authorities to adopt a blended inflation measure that takes into account the movement of prices in both currencies.
Adopting a weighted approach yields a more accurate position obtaining on the ground. Further to the above, as the economic environment has evolved over time, it is time that the authorities review the basket of items used for the calculation of inflation.
It is no longer very accurate, for example to use the price movements of bread with the same weight as it had in the past as many households now rely on alternative substitutes including sweet potatoes, madhumbe and other available food substitutes. Traditionally, inflation in Zimbabwe has broadly been based on such category of items as food (31 percent weight) and housing water, electricity/gas and other fuels (28 percent weight) as the most important groups.
Inside the food category for example, made up of bread and cereals, meat, fish and sea food, milk, cheese, eggs, oils and fats, fruit, vegetables, sugar, jam, honey, chocolate and confectionery items, it is necessary to review the various sub weights for items such as cheese, meat, sea food, chocolate, bread and cereals to reflect reality in a modern average household.
The reality is that while a review of this category brings the picture much closer to accuracy and relevancy, it must not be viewed as an acknowledgement of worsening of lifestyles.
It must be viewed as enhancing the relevancy of the measure being analysed. Authorities are urged to carry out a formal study of the actual relevant items that now formulate the basic basket formulating the CPI.
The above is critical in buttressing the emerging positivity by avoiding continuous reporting of negative indicators. We therefore concur with the recent moves by the authorities in reviewing the manner of reporting inflation by firstly using a blended approach and now call for a further step of reviewing the inflation basket.
To this end, we note positively that for the latest inflation of August 2020, the following picture emerged where it is reported that while the traditional month-on-month inflation rate was 8,44 percent shedding 27,09 percentage points on the July 2020 rate of 35,53 percent and the year-on-year inflation rate (annual percentage change) for the month of August 2020 as measured by all items CPI stood at 761,02 percent, the blended month-on-month inflation rate in August 2020, however, was 1,41 percent shedding 15,24 percentage points on the July 2020 rate of 16,65 percent.
The blended year-on-year inflation rate for the month of August 2020 as measured by all items blended CPI stood at 420,91 percent.
Apart from this being a fair reflection of the actual situation on the ground experienced by economic agents, it helps to set positive expectations.
In fact that general argument can be proffered for the strengthen exchange rate of the local currency unit against the US dollar. The joint movements of these two parameters are expected to contribute positively in sustaining the recovery process of the economy.
Misheck Ugaro is a former expatriate banker once based in several SADC countries and currently works as a Corporate Advisory Services Consultant. He is the founder of Rucabel Investments Private Limited, an investment company based in Zimbabwe. He is a member and past Vice President of the Zimbabwe Economics Society. He can be contacted on (263) 777052004/712808140/[email protected] Linkedin: https://www.linkedin.com/in/misheckugaro Twitter: @twitcagan.com