Inflation, why it matters

 

News that the country’s inflation rate has hit the highly anticipated single-digit has created a lot of debate and excitement. In some cases, the development has caused confusion.

The National Statistical Office (NSO) reported last week that Malawi’s inflation rate, as measured by the Consumer Price Index (CPI), hit the single digit at 9.3 percent in August 2017, the first time since December 2011.

The achievement has come way ahead of the December 2017 target set by the Reserve Bank of Malawi (RBM) largely due to easing prices of food, particularly maize, which has a huge weight of 50.1 percent in the CPI—the aggregate basket of commodities NSO uses to measure the price level of consumer goods and services purchased by households.

In the wake of the news of the single digit inflation, some sections have “wondered” why some manufacturers are raising prices of their products. Yet others have asked when prices of consumer goods and services will take the downward spiral. It is worth appreciating that it is much easier for prices to go up than down as economists say, prices tend to be “sticky” going downwards.

To appreciate how inflation works, or why it matters, there is need to get what it means.

Former president Bakili Muluzi had his own definition of inflation which, somehow, landed in many of his audience’s minds. He said about inflation: “Inflation ndi kanyama kamene kamakweza mitengo ya zinthu. Tikuyenera kuthana nako…” He likened inflation to an imaginery “beast” that influenced consumer price hikes.

Technically, though, inflation refers to the rate of the general rise or movement in prices of goods and services consumed in an economy. Put in another way, inflation is a general and sustained rise in the level of prices of goods and services.

Mark “rate of movement in prices”. Downward inflation does not necessarily translate into prices going down. It simply means prices of goods and services will still rise, but at a slower or lower pace than when inflation is on the rise.

Back to the inflation rate at 9.3 percent. Through the social media, one economist suggested that to convey the message to the masses it should be presented like this: “Mu mwezi wa August chaka chino mitengo ya katundu inakwera ndi K9 pa K100 iliyonse poyerekeza ndi [August] chaka chatha pomwe inakwera ndi K22.80 pa K100.”

Inflation is more than figures or the single-digit, double-digit and even triple-digit. The inflation rate is arrived at by calculating the percentage price increase in goods and services over a given period. The period usually covers a month, or indeed a year.

To compute inflation, prices of selected goods and services consumed in an economy are captured, added together or combined to come up with an average price technically called a price index. The price index is in turn built from the selection of goods and services, notably the CPI.

Now that single-digit inflation rate has been achieved, the key challenge remains on sustaining the same. Stable inflation is one critical factor of macroeconomic fundamentals. It helps both individuals and businesses to make long-term plans. It is a factor towards an improved business environment alongside lower real interest rates. n

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