Why inflation rate should be our concern

Fresh from last week’s Valentine’s Day festive mood that was somehow subdued by the observance of Ash Wednesday, marking the first day of the holy season of Lent that offers Christians time for reflection and repentance ahead of Easter, Malawians woke up to gloomy headlines on Monday. The inflation rate has risen to 35 percent amid elevated pressures.

The National Statistical Office (NSO) said the country’s year-on-year inflation rate for January 2024 increased by 0.5 percentage points to 35 percent, the highest in 11 years.

Inflation is not a term that is widely discussed in everyday conversations, yet it heavily impacts our daily lives.

When it comes to defining inflation, I always recall former president Bakili Muluzi’s attempt to demystify it and ensure the masses understood it better. He likened inflation to an imaginary “beast” or monster that influenced consumer price hikes: “Inflation ndi kanyama kamene kamakweza mitengo ya zinthu. Tikuyenera kuthana nako…” I thought he nailed it.

Technically, though, inflation refers to the rate of the general rise or movement in prices of goods and services consumed in an economy. It is also defined as the general and sustained rise in the level of prices of goods and services.

The key phrase is “rate of movement in prices”. But it is also worth noting that a downward trajectory in the inflation rate does not necessarily translate into prices going down. Prices will still go up, but at a slower pace than when inflation is on the rise because, as economists say, it is much easier for prices to go up than down since they tend to be “sticky” going downwards.

To further illustrate inflation, the other time an economist suggested that packaging of the news should go something like “mu mwezi wa January chaka chino mitengo ya katundu inakwera ndi K35 pa K100 iliyonse poyerekeza ndi [January] chaka chatha pomwe inakwera ndi K22.80 pa K100” in reference to the 35 percent and its corresponding one for the previous year.

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.

In Malawi, food, especially maize, has a greater influence on the rate as it has a weight of 53.7 percent in the consumer price index (CPI), the aggregate basket of goods and services used in computing inflation.

During years of normal rainfall where harvest is projected to be in excess, inflation rate has tended to go down during harvest from April or there-abouts. However, the El Nino weather phenomenon dominated by dry spells in most parts of the country dampens hopes of the rate slowing down any time sooner than May or June.

My thought is that the inflation situation has been worsened by some decisions on monetary and fiscal side, including devaluation or realignment of the currency and upward adjustments of interest rates. Delays to import maize to flood the market to contain the influential maize price, also contributed as the market was starved and prices went up in reaction to factors of demand and supply.

In the end, we have found ourselves in a situation where rising inflation has completely eroded consumers’ disposable incomes. Today, many people cannot afford to buy basics they used to in 2020 when inflation was in single digits or even February last year, leading to deteriorated living standards.

To ease inflationary pressures, the Reserve Bank of Malawi (RBM) has traditionally resorted to raising the policy rate to reduce money supply or circulation in the economy. However, the reality on the ground is that the inflation, in our situation, does not seem to arise from having more money in circulation, but rather the value of the kwacha exchange rate which triggers a cost-push effect, especially on the prices of imported products.

The scenario has recently sparked debate on whether monetary authorities at RBM could be using a wrong tool to tame inflation. Perhaps it is time the local manufacturing industry was incentivised to achieve import substitution and ease the demand for foreign exchange, thereby taming the exchange rate value.

Politics should also be taken out of the economic equation by allowing professionals such as economists to play the free role towards finding solutions. Further, the monetary and fiscal policy sides should be reading each other.