Inflation remains single digit

“Inflation has stabilised in single digit in 31 months due to the prudent fiscal policy of the government and continued monetary restraint which helped anchor inflationary expectations and partly to lower food prices which placed a lid on headline inflation.

“The drop in inflation in three months running (October to December) was mainly on account of the decline in food inflation. Food inflation, after rising steadily from 4.3 per cent in February 2012 to 5.5 per cent in July, fell steadily, reaching 3.9 per cent in December. On the other hand, non-food inflation increased from 11.2 per cent in February to 12.5 per cent in August before dropping to 11.6 per cent in December,” it said.

According to the statement, the decline in inflation provided concrete evidence of an economy that was growing at a fast rate.

It said declining inflation had created a conducive environment for businesses to plan on a long-term basis, thereby enhancing the business investment, which had helped put the economy on a higher growth path.

“The decline in inflation has also supported the local currency which experienced some turbulence in the first half of 2012 to enhance investors’ confidence in it. The value of the cedi, which depreciated cumulatively by 17 per cent in November 2012, has since stabilised, with some intermittent periods of appreciation. Similarly, the decline in inflation in three months running up to the end of the year has meant an increase in real interest rates.

“This, together with the stability in the cedi, has improved the attractiveness of cedi assets relative to foreign assets. The critical part of the macroeconomic equation, however, is what will happen to inflation going forward.

“This is important not only for growth but also for the cedi’s outlook, as a high rate of inflation often leads to negative real interest rates, which together undermine confidence in the local currency,” it said.

It said the medium to long-term outlook for inflation was more promising.

With a strong economic growth forecast, tight fiscal stance, current levels of interest rates and greater exchange rate stability, the ministry expected inflationary pressures in the country to remain moderate and inflation to drop to five per cent in the medium term. In the end, however, inflation would continue to be heavily influenced by food prices, the statement said.