23 January 2013

Zimbabwe: Inflation to Maintain Downward Trajectory

ECONOMIC analysts say the decline in the country's inflation rate, which continues on a downward trajectory, is sustainable and likely to continue during the first quarter of this year.

According to the Zimbabwe National Statistics Agency (Zimstats), annual inflation for December shed 0,08 percentage points to 2,91 percent, from the November rate of 2,99 percent, as the rate of increase of prices slowed down from the time when prices were rising.

There has been little upward movement on prices of clothing and footwear as well as recreation and culture.

According to figures from Zimstats, the month-on-month inflation rate stood at 0,131 percent, down a minuscule 0,003 percentage points on the November rate of 0,134 percent.

"This was mainly weighed on by declines in clothing and footwear, furniture and recreation weights," said Zimstats.

The year on year inflation rate for food and non-alcoholic beverage stood at 3,81 percent, while non-food inflation stood at 2,51 percent. The month on month food and non-alcoholic beverages inflation rate stood at 0,29 percent, shedding 0,11 percentage points on the November rate of 0,18 percent and non-food month on month inflation was at 0,06 percent, shedding 0,05 percentage points from 0,11 percent.

The Consumer Price Index (CPI) for December stood at 102,90 compared to 102,77 in November and 99,99 in December 2011. Zimstats says it will change its CPI weights starting in January this year.

Economic analyst Eric Bloch told The Financial Gazette's Companies & Markets that the decline in the rate of inflation, albeit marginal, was primarily due to increased competition from imported products such as clothing.

He said over the past six months, there has been a minimal increase in charges for utilities and services provided by government, local authorities, and parastatals.

"Inflation is likely to continue at low levels for the forseeable future, provided that Zimbabwe retains the multi-currency system. Reverting to our own currency could stimulate a recurrence of the hyperinflation of 2008 (with) a great risk that government will again resort to excessive money printing," Bloch said.

David Mupamhadzi, a Harare-based economist, agreed, but said the decline in inflation is largely due to the prudent fiscal policy pursued by government.

"The macroeconomic stability brought by the multiple currency system has also managed to tame expectations in the market. This has also played a significant role in ensuring that prices remain stable in the economy," Mupamhadzi said.

He maintained: "Inflation is likely to remain in the single digit territory in 2013, and the five percent target for 2013 is realistic. However, going foward the country will face strong inflationary pressures from food inflation, wages, high cost of funds, expenditure overruns related to the referendum and elections."

Bloch said low disposable incomes and the consequent drag on consumer spending power, which translated into low demand volumes, has curbed price increases on the local market.

Bloch said however, economic decline, with concomitant diminution in disposable income, is likely to cause some increase in the rate of inflation, as businesses could be forced to increase prices to recover costs.

This, he said, could be countered by supply then exceeding market demand, and hence greater price competitiveness.

Another Harare-based economist, Farayi Dyirakumunda, said inflation would most likely remain under control this year with underlying core inflation rates projected to trend sideways or downwards throughout 2013.

"The debt and confidence crisis will have a dampening effect on global economic performance and growth, which will in turn reflect in weak demand including imports. In addition, the growth dynamics in the local economy should only improve in the second half of the year at the earliest," Dyirakumunda said.

"Reflecting this subdued growth outlook over the next year or so, I forecast relatively stable inflation in the economy reaching 2,6 percent within the first half. When demand is generally weak, as is the forecast, companies will cut their prices and the inflation rate will decline," Dyirakumunda said.

Some analysts warned heavy dependence, particularly on South Africa, for imports of both food and no food items, could trigger imported inflation in the event that the rand firmed against the United States dollar.

One of the largest retail outlets, OK Zimbabwe, has said it imports about 60 percent of its retail goods due to constrained capacity utilisation within the local manufacturing sector.

"This means that should the rand start to firm, prices may rise significantly, driven by a strengthening rand," said a Harare-based analyst.

This form of imported inflation would also be bolstered by firming global oil prices as the euro zone starts to steady up and the euro strengthens and oil demand start to increase, putting pressure on crude oil prices.

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