Inflationary pressures to pile till year-end

Zimbabwe’s manufacturing companies as represented by the Confederation of Zimbabwe Industries (CZI), have expressed fears that inflationary pressures are likely to remain elevated till the end of the year, Business Weekly can reveal.

While inflation has been slowing down since it peaked at 837 percent in July last year, the market has experienced some inflation triggers such as growing money supply, weakening exchange rates, and the introduction of Statutory Instrument 127, to name but a few. While the June 2021 annual inflation fell to 106,64 percent from 161 percent in May, the month-on-month inflation surged, sending spine chilling waves to many stakeholders.

The month-on-month inflation rate in June 2021 was 3,88 percent gaining 1,34 percentage points on the May 2021 rate of 2,54 percent.

This is the third consecutive month inflation has increased month-on-month.

However, despite these month-on-month increases in inflation, the central bank expects annual inflation to continue on a downward path although it recently revised its inflation forecast to 25 percent, from the previous 10 percent. Industry is, however, pessimistic that such low inflation levels could be achieved. Companies are forecasting that year-on-year inflation will be around 119 percent by year end, according to CZI’s first-quarter business survey.

“Some companies have complained that it is taking a period of eight to nine weeks for them to access foreign exchange at the Foreign Exchange Auction Market, which creates the possibility of sourcing forex on the parallel market. Thus, the parallel market exchange rate falls into the price determination equation and it informs inflation expectations,” reads part of CZI’s first-quarter business survey.

While the survey was conducted for the first quarter, a senior official with the Business Management Organisation, who requested for anonymity, said sentiment was still the same.

“You saw what happened with SI 127, such triggers fuel inflation pressures, and I think industry is still skeptical of official inflation figures. There is still expectation that official inflation targets will not be achieved.”

Inflation expectations are what businesses expect future inflation to be, and they matter because these expectations affect business’ behaviour and pricing models.

If businesses expect inflation to be higher and it acts on those beliefs, it could cause inflation to rally.

The challenge for policymakers is that even though they know inflation expectations are important, expectations are not something that they can observe directly, according to Rob Rich, Director of Cleveland Fed’s Center for Inflation Research.

“They have to rely on measures of expected inflation that are constructed from surveys and economic models.”

Writing in a Cleveland Fed Digest in 2019, Rich said businesses and the general public use what’s known about inflation expectations to adjust their inflation expectations.

“If I were expecting 1 percent inflation, and I learned that others were expecting 2 percent, I’d likely revise my expectations to something higher than 1 percent.

Going by Rich’s reasoning, the gap between industry’s inflation expectations and the central bank’s projection is a worrisome disconnect.

It is a sign that business does not think the RBZ’s set target is realistic and achievable.

Such high inflation expectations by industry could prevent companies from making longer-term economic and financial decisions.

Economist John Robertson’s projections are, however, closer to RBZ’s, than they are to industry expectations. In a research note to clients, Robertson said if the monthly increases in the coming months follow the trend achieved in the first half of 2021, the gap between the 2020 and 2021 CPI will become significantly narrower.

“Forecasts now suggest that the annual rate of inflation will average less than 50 percent in the second half of 2021,” wrote Robertson.-ebusinessweekly.l.zw

Leave a Reply

Your email address will not be published. Required fields are marked *

LinkedIn
LinkedIn
Share