Inflationary pressures continue to mount

According to John Robertson if the inflation trend established this year continues, year-on-year inflation could be below 100 percent from July 2021 onwards.

Inflation might be on a downward trajectory since it peaked at 837 percent in July 2020, but several risk factors remain in place, according to economist John Robertson.

Latest figures from the Zimbabwe National Statistics Agency (Zimstat), show a slowdown in year-on-year inflation for the month of May to 161,9 percent from 194,1 percent in the previous month of April.

If the slowdown continues, year-on-year inflation could fall to below 100 percent by July this year.

However, several risks according to Robertson that could still derail the trend exist.

Last year the consumer price index (CPI) accelerated the most between May (1,097.7) and June (1,958.7) and if inflationary pressures are not dealt with decisively, a similar breakout could be experienced again.

Such a scenario is not far-fetched as witnessed in the out turn of the month-on-month inflation for the period under review.

According to Zimstat the month-on-month inflation rate in May 2021 was 2,54 percent gaining 0,96 percentage points on the April 2021 rate of 1,58 percent.

Inflationary pressure was interestingly coming from non-food items with the month-on-month non-food inflation rate coming out at 3.75 percent, gaining 2.22 percentage points on the April 2021 rate of 1.53 percent.

Robertson reckons inflationary risk is arising from cost increases for goods and services across the economy.

ZESA is already requesting for what it calls a cost-reflective tariff which is about 12 USc/kWh. This is up 60 percent from the current tariff of 7.5 USc/kWh.

Electricity inflation stood at 155,13 percent as of May.

“One of the more serious of these being sharp increases in municipal rates that are having to be recovered from higher prices,” Robertson pointed out.

He added that despite the increase in municipal rates, service provision was still poor.

Instead, the poor quality of services, for roads in particular was adding to increased vehicle maintenance costs.

Robertson thinks that such costs, as well as higher charges for water supply, and refuse removal services, are now being factored into selling prices resulting in increased inflation.

He said while conditions are certainly better than they were a year ago, the determination needed to deal effectively with several basic problems appears to be missing.

“While these problems remain in place, so will the black market exchange rate, and our hopes of rebuilding a local currency that is worthy of respect will remain a pipe dream.”

In a note to clients, Robertson also expressed worry over the trajectory the exchange rate is taking on the parallel market “despite useful improvements in the number of US dollars being made available through the weekly currency auctions.”

As of Wednesday this week, street dealers were paying for US dollars at exchange rates between 125 and 130 and selling at an exchange rate between 135 and 140.

This is against the official exchange rate of 84.7259 as of Wednesday this week. It has hardly moved from 84,5032 at the end of April.

“As more than half of the consumer goods being imported are being paid for with funds bought from black market currency dealers, and as some traders are using the black market rate to calculate selling prices even though they are paying the auction rates for their foreign currency, the threat that inflationary pressures will remain in place is not being overcome.

“These price increases are also sustaining wage increase demands.”

Meanwhile, some of the biggest drivers of inflation with inflation rates above the average 161 percent were meat (211,41 percent), gas (203,09 percent), liquid fuels (201.07 percent), transport (181,30 percent), communication (332,85 percent) university education (329,04 percent) and medical aid contribution (960,66 percent).-ebusinessweekly.cw