What is Happening to Inflation?

In recent days, there has been some confusion about inflation in Zambia. On 27th October 2016, the Central Statistical Office (CSO) announced a 6.4 percentage-point drop in the annual rate of inflation from 18.9% in September to 12.5% in October.

Some commentators have interpreted the drop in the annual rate of inflation as a fall in actual prices. Ordinary Zambians have been confused because when they go to the shops they don’t see falling prices. Far from it, they see prices still going up.

Ordinary Zambians are not wrong. Prices are still going up. But the only thing which has changed is that the rate of increase is now slower than it was before.

In Zambia this how inflation is measured: the CSO gathers the average prices paid by consumers for hundreds of different items during the first ten days of each month, noting the prices of the same products so that over time they compare ‘like with like’. The average price of this representative basket of goods and services is what is referred to as the Consumer Price Index (CPI). The CPI is calculated on a monthly basis and is then compared to a reference base period. Using the CPI, the CSO uses the differences in the CPI between two points in time to calculate the inflation rate for that period. Thus the Inflation rate measures the speed at which the prices of this basket of goods and services are increasing, not the prices themselves.

The inflation rate can then be measured by comparing the changes in the CPI of a particular month to the CPI of the same month last year. This is known as year-on-year inflation and it is the headline inflation that is used by the CSO. The CSO also measures inflation by comparing the changes in the CPI in a particular month to the CPI of the previous month. This is called month-on-month inflation.

The CSO inflation figures that have been the focus of debate (the drop by 6.4 percentage points) are what economists call “year on year” inflation figures. They compare the cost of goods and services in a certain month in one year (in this case, October 2016) to the same month the previous year (October 2015).

To illustrate this, think about a Zambian Mum doing her shopping after she is paid at the end of the month.

  • In September 2014, she goes to the supermarket to buy food and other essentials and then passes by the local post.net shop to pay for utilities (water and electricity). She spends ZMW1,000 on her shopping.
  • Between September 2014 and September 2015, the cost of these goods and services increases. This is largely because of the depreciation of the Kwacha. So by September 2015, the same shopping trip now costs Mum about ZMW1,200. This is an increase of 20%.
  • Between October 2015 and October 2016, the Bank of Zambia takes remedial action to combat this rapid increase in inflation. This means that while the cost of Mum’s shopping continued to increase, it did so at a slower rate than before. So between October 2015 and October 2016, the cost of the same basket of goods and services increased from ZMW1,200 to ZMW1,350. This is an increase of ZMW150, which gives an annual inflation rate of 12.5%.
  • So, the rate of increase in the cost of Mum’s basket during the last 12 months [12.5%] is lower than the rate of increase during the 12 months prior to October 2015 [20%]. In other words, the inflation rate has fallen, but prices are still going up.
  • Notes to editors:

  • (1) The 27th October CSO release which stated “Annual Rate of Inflation Drops by 6.4 Percentage Points” can be seen here: http://www.zamstats.gov.zm/report/Monthly/Vol%20162%202016%20The%20Monthly%20October.pdf

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