Inflation slow-down doesn’t mean decrease in prices – Zimstat




Taguma Mahonde,

DO not mistake inflation slow-down with a decrease in the price of goods and services, Zimstat has said in a paper titled “Demystifying Inflation Deceleration”.

The country’s statistical agency said the decrease in inflation the country has been experiencing since inflation peaked at 837 percent in July 2020, is known as inflation deceleration.

It also said the method of calculating Zimbabwe’s inflation is according to international standards. Of late, some Zimbabweans have been questioning inflation data released by Zimstat showing a slowdown in inflation.

Many misinterpreted this and thought Zimstat meant the economy was experiencing price decreases. But Zimstat has now stepped in with an explanation and background on how inflation is calculated.

In a paper titled “Demystifying Inflation Deceleration” Zimstat director general, Taguma Mahonde, simplified, with an illustration, what a slow-down in inflation means.

“Inflation could be taken as a moving object, that at one time was moving at 837,5km/hr (read 837,5 percent y-o-y inflation rate for July 2020),” he said.

“A braking system is then applied to this moving object (read monetary and fiscal policies that retard inflation), and the object decelerates from 837,5km/hr to 194,1km/hr (194,1 percent being y-o-y rate of inflation for April 2021),” Mr Mahonde illustrated in the write up.

He added that although the speed of 194,1km/hr shows deceleration from 837,5km/hr, the object is still in high speed and moving forward. The same goes for the y-o-y inflation rates, which are decreasing while prices are increasing.

“This development is termed inflation deceleration, or is referred to as inflation increasing at a decreasing rate, which should not be mistaken with a decrease in the price of goods and services,” Mr Mahonde explained.

He hinted that given the current high rate of inflation, the economy cannot not be said to be stable in terms of price increases unless it slows down to around 10 percent.

“Internationally, the recommended y-o-y inflation rate that stabilises an economy is single digited that is, between 0 and 10 percent,” reads part of the paper signed off by Mr Mahonde.

He said very few countries can claim not to have inflation as any general price increase leads to inflation. What differs is the level of inflation.

“As long as the object is moving forward, it should be taken as exemplifying an increase in the general price level at a pace depicted by the inflation rate.”

However, when prices start to fall, as Zimbabwe experienced around 2016/17, the scenario is known as deflation. Mr Mahonde also noted that Zimstat uses international prices in calculating inflation.

This includes standards as per the United Nations, SADC and COMESA. “In addition, the methodology used by ZIMSTAT is periodically reviewed by the International Monetary Fund (IMF), COMESA and SADC,” according to Mr Mahonde.

In compiling the Consumer Price Index, ZIMSTAT monitors price levels of 495 products categorized according to United Nations Statistics Division’s Classification of Individual Consumption by Purpose (COICOP).

About 35 000 price observations are collected throughout the country within a five-day data collection period. More than 4 000 retail outlets in both rural and urban areas are surveyed throughout the country.

These range from supermarkets, general dealers, departmental stores, liquor stores, open markets like Mbare farmers market, fuel service stations and garages, hotels and restaurants, fast foods outlets, bus and taxi companies, hair salons, pharmacies, communication service providers, government and private hospitals as well as rural and urban district councils. Prices are also compared like for like with matching codes.

For example, a loaf of bread from company X in March 2021, cannot be compared with a loaf of bread from company Z in April 2021 within that same outlet, even if the quantity and price variations are the same.

Mr Mahonde said while other institutions and individuals can also calculate inflation, the samples used might not be exhaustive and this might introduce a bias in the results.

Some stakeholders use proxies and secondary data in calculating the index, and Mr Mahonde said these two sources of data have some inbuilt errors, which get magnified over time when calculating inflation numbers.

“Zimstat uses primary data unlike other compilers who indicated that they use secondary data like stock exchange and Purchasing Power Parity (PPP) data among other variables.”

The use of stock market data has limitations in that stock market prices do not reflect the general price level in the economy but reflect profitability of the share’s company, speculation and market volatility, among others.

The PPP has a number of shortcomings, including differences in product quality, differences in composition of the basket of goods, and existence of trade barriers across countries.