Why surging inflation bad for all
THE surge in inflation to a near all-time high in September is bad for consumers, businesses and the Bank of Ghana (BoG).
Investment bank, GCB Capital, said in its policy insight on the September inflation reading that the increase would impact negatively on interest rates, resulting in higher lending cost to businesses and consumers.
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In the insight released last week, the company said the situation could worsen in the coming months as developments signalled that price increases would continue.
“Inflation expectations are still elevated, and we expect the pass-through of cedi depreciation, the upward utility tariff adjustment and the increasing central bank monetisation of the fiscal deficit to sustain inflation higher.
“The continuous cedi depreciation pressure remains a major driver of inflation as its pass-through effects keep general prices elevated,” GCB Capital said.
Implications
The investment bank explained that the rising inflation could also force the central bank to strongly consider a further increase in the policy rate – the benchmark rate used to signal the direction of price changes.
It said it expected the September rate of 37.2 per cent to fuel hikes in nominal yields in the fourth quarter.
“With the heightened inflation expectations, the extremely hawkish monetary policy stance and the lingering concerns about a potential debt treatment, we expect nominal yields to climb higher in quarter four.
“However, fixed-income valuations are already at their lowest, and we believe investors have priced the prevailing macro-fiscal risks into their valuations,” it said.
As a result, GCB Capital said it expected the upward movement in yields to be marginal.
IMF negotiations
The investment bank, however, said an expedited negotiation with the International Monetary Fund (IMF) and clarity on the nature and form of any potential debt treatment could improve market sentiments.
On the impact on monetary policy, GCB Capital said: “Given the persistent inflation run, the elevated underlying inflationary pressures and the emerging upside risks to inflation, we maintain scope for further monetary tightening in November.
“However, given the tightening credit stance and the controlled loan book expansion, the risks to growth are pronounced.
“Thus, the Monetary Policy Committee’s (MPC's) final meeting in November could consider balancing the risks to both inflation and growth,” it said.
Headline inflation
The Government Statistician, Prof. Samuel Kobina Annim, announced the headline inflation for September on October 12 at 37.2 per cent.
The data showed that housing and utilities, furnishing and household equipment, transport, personal care and miscellaneous and the food and non-alcoholic beverages divisions were the top three drivers of inflation for the reference period. The month-on-month inflation print for September was two per cent.
Inflation from the food basket, which has a weight of 43.7 per cent, came in at 37.8 per cent but accounted for 16.5 per cent of the 37.2 per cent overall inflation.
The heavily weighted non-food inflation, with a weight of 56.3 per cent, also came in at one per cent lower at 36.8 per cent.
Drivers
The drivers of inflation for September 2022 reflected the impact of the major utility tariff hike that took effect from September 1 this year, the pass-through effects of the cedi deprecation and its lagged impact on inflation, and the rising ex-pump fuel prices, mainly due to the depreciation effect on fuel price computation.
Base year
The Ghana Statistical Service also started a new Consumer Price Index (CPI) series from this September reading.
Therefore, the inflation rate of 37.2 per cent is not comparable to the inflation figures under the old series until the chain-linked inflation numbers are published.
The government statistician said the linkage would be done and announced later this year.
But the new inflation series extended coverage to the 16 administrative regions from the previous 10.
It, however, maintained the composition of the CPI baskets and the irrespective weights.
The GSS also adjusted the CPI price reference year to 2021 from 2018 and re-distributed the regional weights to include the new regions.
Looking ahead
GCB Capital said the cedi depreciated by 5.12 per cent against the US dollar in September to bring its year-to-date depreciation rate to 41 per cent.
That, it said, kept inflation on imported items elevated at 40.70 per cent.
“While crude oil traded below US$100 per barrel in September, the depreciation effect kept ex-pump petroleum prices high and filtered through to transport fares and general prices.
“Additionally, the increasing monetisation of the fiscal deficit due to the challenging domestic and external financing conditions partly accounts for the sustained inflation run.
“Thus, the lagged impact of the increased utility tariffs and the potential seasonal price effects around the Yuletide could further heighten inflation expectations,” it said.
It explained that with the near-term risks to inflation still pointing to the upside, “we now expect inflation to climb higher in quarter 2022 and end the year significantly above the government's target of 28.5 per cent”.
