Ghana’s current inflation rate stood at a staggering 11.4% by June, 2013. This was reported by the Dr. Philomena Nyarko, the acting government statistician. That was a move up from the 10.9% recorded in May, 2013. If inflation reaches the double-digits, it is known as hyperinflation. If this happens, you will need a wheelbarrow to buy a loaf of bread. Fortunately, it happens very rarely, and only when money is printed without regard to the inflation rate. It happened in Germany in the 1920s and in Zimbabwe in the 2000s.
As is the case in most economies, there are uncertainties when Inflation rates go up. However, the real issue is what it means and how it affects us. Here are answers to some of your mind boggling Inflation questions.
What is inflation?
According to the American Heritage Dictionary, Inflation is a persistent increase in the level of consumer prices or a persistent decline in purchasing power of money, caused by an increase in available currency and credit beyond proportion of available goods and services.
In simple terms, inflation is an increase in the level of prices of goods and services in the country. A higher inflation means that you can buy less for your money. Most economists consider a normal level of inflation to be 2-3% per year. Inflation can be measured in a variety of ways, but the method currently used by the Ghana Statistical Service is the Consumer Price Index (CPI).
Consumer Price Index
Consumer Price Index (CPI) measures the change over time in the general price level of goods and services that households acquire for the purpose of consumption. This includes items such as services, housing, electricity, food, and transportation.
How does inflation affect businesses?
Constantly increasing prices leads to ‘menu costs’; that is, companies will have to spend money changing and reprinting their prices. Prices need to be raised and this infuriates consumers who blame producers. Thus, businesses try to keep from raising prices. This squeezes profit margins and can cause companies to produce products that sell for less in real terms than they cost to produce.
For the general consumer, shopping round for the best price might not seem like a daunting task, but for a business who buys in large volumes, a slight change in prices can have important implications. They prefer to lock in prices under long term contracts. This will hurt the supplier so eventually suppliers will refuse long term contracts.
As individuals, we may get slightly infuriated every time a company decides to increase their prices. If the inflation rate is high, employees also demand higher wages from employers, leading to Wage Inflation. This adds pressure onto employers whose costs have now increased and will then raise prices to maintain their profit margin. Economists call this “Cost-Push Inflation.”
How does Inflation affect individuals?
Inflation usually affects your buying power. That is because rising prices means you have to pay more for the same goods and services. You can however benefit from Asset Inflation, such as in housing or stocks, if you own that asset before the price rises.
Inflation does not affect everything equally. Gas prices can double while your home loses value. Inflation has another side-effect; once people start to expect inflation, they will spend now rather than later. That is because they know things will only cost more in the future. This consumer spending heats up the economy even more, leading to more inflation. This situation is known as Spiraling Inflation.
What are causes or drives Inflation?
The main causes of inflation are either excess aggregate demand (economic growth too fast) or cost-push factors (supply side factors). One third of all goods are imported in the UK. Hence if there is devaluation, then import prices will become more expensive leading to an increase in Inflation. Another example is the price of oil, if the oil price increases by 20%, then this will have a significant impact on most goods in the economy, which would lead to Cost-Push Inflation.
In Summary…
If inflation is low, prices of food should go down, interest rates on loans should go down, the value of the Ghana Cedi should appreciate and subsequently, prices of imports should go down.
Lower Inflation = Cedi appreciation to foreign currencies = cheaper imports = lower prices for goods and services
This would lead to lower interest rates --- less expensive borrowing costs for industry and private individuals ---- more investments ---- more economic growth.
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