Home » Industry » Zim’s Slackening Inflation – Deflation or Disinflation? [analysis]

YEAR on year inflation for January as measured by the all items Consumer Price Index (CPI) shed 0,48 percentage points on the December rate of -0,80 percent to settle at -1,28 percent, continuing a downward trajectory witnessed over the past few years. This means that prices continued to fall compared to the same period last year, with an average decline of 1,28 percentage points between January 2014 and January 2015. According to the Reserve Bank of Zimbabwe (RBZ), the country’s inflation is expected to remain in the negative territory for the greater part of the year, reflecting dampening inflationary pressures or “price correction”. Annual inflation has remained on a downward trend since the beginning of 2012, and has declined from 3,7 percent in 2012 to 1,6 percent in 2013, before it further dropped to -0,2 percent in 2014

. The country first recorded a negative inflation rate in February 2014. Last month, it further slid to -1,28 percent on an annual basis. This has sparked debate on whether Zimbabwe is in actual deflation or is just in a price self correction curve. Inflation is a sustained increase in the general prices of goods and services in an economy over a period of time, measured as an annual or monthly percentage increase.

Disinflation is a slowing in the rate of price inflation, and does not mean prices have actually declined. Instead, prices will still be increasing but at a slower rate. “Disinflation is good for a nation as this will result in increased consumer purchasing power,” said Techfin Research in a note. However, deflation is a situation when the overall price level decreases so that the inflation rate becomes negative. This results in a decrease in demand in the economy, which can lead to an economic depression. The current inflation rate, although substantially correct, was in no manner reflective of the rate of inflation on basic essential consumables on shelves in shops.

Despite Zimbabwe’s inflation remaining negative since October 2014, the RBZ is of the view that the country is experiencing disinflation and not deflation. The RBZ said price reduction in the national economy was a necessary process towards correcting the high prices obtaining in the country. But Techfin said the obtaining situation amounted to deflation. “Zimbabwe is experiencing slow economic growth, weakening aggregate demand, high unemployment, tight liquidity, increased loan defaults, reduced lending by banks to productive sectors, which are all signs of deflation,” said Techfin.

Techfin said all these symptoms were actually a warning that something is wrong in the economy and needs to be addressed policies should be skewed towards stimulating aggregate demand and improving liquidity. Manufacturers continue to lose their pricing power, implying that there is less incentive to manufacture goods as lower sales volumes have a negative impact on corporate earnings. Economist, Brains Muchemwa, said Zimbabwe was sliding into deflation due to shrinking economic activity and urgently needed fresh foreign capital to stimulate growth, “We face quite some prolonged depression going forward in the economy and it can deepen. We need to make a commitment to address the core structural challenges and not to deal with symptoms,” he said.

The year on year food and non-alcoholic beverages inflation, which are prone to transitory shocks, remained negative at -2,74 percent, while the non-food inflation rate was at 0,57 percent. Food prices continued to fall on account of depressed effective domestic demand. The month on month inflation rate for January was at -0,34 percent, shedding -0,25 percentage points on the December 2014 inflation rate of -0,09 percent. The month on month food and non-alcoholic beverages inflation stood at 0,40 percent in January, gaining 0,76 percentage points on the December 2014 rate of -0,36 percent.

The month on month non-food inflation stood at -0,69 percent, shedding 0,73 percentage points on the December rate of 0,04 percent. The CPI for the month ended January stood at 99,19 compared to 99,53 in December 2014 and 100,48 in January. The RBZ indicated that the country’s inflation developments were expected to remain under the influence of changes in oil and food prices as well as the RandUS dollar exchange rate.

Source : Financial Gazette