Beat inflation, spur growth
Inflation shouldn’t be new to you if you have followed this column for a while. Time and again, l have had to look at issues surrounding inflation because it affects almost everything around us, as far as economics is concerned.
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But do you really believe that? Well, you should because it’s the truth!
And the basis is as follows: As a measure of time-based price movements, inflation plays a major part in both household and business planning. If you can estimate or anticipate an expected level of price movement over a period, you will be able to plan or allocate your resources in an effective manner so as to derive the most benefits, all things being equal.
Yes, the average man, that is the “economic actor”, should have a better understanding of the economic environment when inflation is held in check. This way, planning is less stressful as deviations wouldn’t be too drastic.
What then is the case when the opposite happens, that is, when inflation is considerably out of control? Obviously, it would be difficult to plan effectively when you cannot estimate with some degree of certainty the direction of general price level.
So, practically, if you planned to spend 100 cedis on an item and you budget that amount for it only to realise a 10 per cent increase at the time of purchase, it means that you can only have that item if you pay more than what you planned to spend.
That will throw your budget out of gear and cause a readjustment in order to realign all your expenditure. In a very tight economic environment, a little price increase can cause serious problems for the low income family.
Let me also point out here that price increase or decrease does not affect only the individual as it does affect business and government too. Whereas the example above can suffice for businesses and households, the example of the impact of inflation on government can be far more complex.
Using the example above, assuming that the individual involved experiencing this sort of situation lives in country A and that he is a civil servant.
Civil servants, realising the debilitating effect of inflation on their household income - real income - would ask for more money from the government of country A. The government, most likely, would respond by increasing the wages and salaries to compensate for the elevated cost of living.
Now, if the government of country A is running a deficit national budget (where it literally does not have enough revenue to cover all expenditure and cannot increase taxes further), it means that it has to find other ways of raising money to finance the deficit.
In the absence of donor funds and other patient cash from development partners, country A may have to resort to borrowing.
Borrowing for consumption will only increase the national debt stock of country A and since the money borrowed was not channelled into productive ventures that could generate enough cash for the repayment, it means that country A, if that should continue, could build its national debts to unsustainable levels.
Ah, l hope you have followed the drift thus far! This is the primary effect of inflation on individuals, households and governments.
For this reason, governments all over the world always plan to ensure that the general price level is stable to reap the suite of benefits price stability brings.
Most central banks play that role on behalf of government. As independent institutions, central banks are charged with the mandate of maintaining general price stability with an eye also on promoting economic growth.
And on September 19 the Bank of Ghana did just that by maintaining the policy rate at 26 per cent in order to ensure that the risk to inflation was contained.
At the conclusion of the 72nd regular Monetary Policy Committee (MPC) meetings, the Committee’s decision was to maintain the policy rate at 26 per cent, explaining, in summary that the estimation of the risk to inflation showed no significant need for a policy change.
“In assessing the current economic conditions, the Committee noted the moderation in headline inflation since the July meeting on the back of continued cedi stability, easing inflation pressures, and tight credit conditions which implicitly reflect continued monetary policy tightness”, the press release to the MPC meeting summarised.
“This, together with projections of tighter fiscal consolidation and lower growth, contributed to the inward shift in the forecast horizon from the third quarter to the second quarter of 2017. Despite these positive developments, the Committee observed that the current level of inflation is still high compared to the medium term target”, the Committee concluded.
The influencing factors were as follows: Headline inflation, which stood at 18.4 per cent in June, declined to 16.7 per cent in July, but inched up to 16.9 per cent in August 2016. Meanwhile, the significant turning point in July, given that inflation had peaked at 19.2 per cent in March had given hope for optimism among analysts and other market watchers.
The explanation is as follows: “Slowdown in July was largely attributed to base effects from non-food inflation which fell by 2.9 percentage points to 21.2 per cent while food inflation remained virtually unchanged. In August, inflation inched up, again due to base effects arising from a downward revision in petroleum products a year earlier”.
Industry sees reason to agree with the Bank of Ghana. “Maintaining the policy rate at 26 per cent means that cost of credit will not come down but now considering the stability achieved since the beginning of the year, businesses were expecting a bit of reduction to give us some comfort because by reducing it is very likely that our cost of credit will also come down”, Seth Twum Akwaboah, the chief executive officer of Association of Ghana Industries (AGI) said.
However, “the decision also means that stability has been consolidated for a while, we also have a positive outlook that in the coming months we will see further reduction”, he added.
With eyes firmly fixed on maintaining stable prices generally, the Bank of Ghana is conducting policy in a way as to ensure that inflation is maintained within the target band of 8 per cent, plus/minus 2 percentage points by second quarter 2017.
All in all, the target appears on course. “Inflation expectations by businesses, consumers and the financial sector also eased on the back of continued stability in the local currency”, the MPC press statement said.