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Resilient inflation

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CONSUMED WIDELY—Maize

Malawi’s inflation continues to hold within the single digit bracket seen at 9.8 percent in the Common Market for Eastern and Southern Africa (Comesa) as measured by the region’s Harmonised Consumer Price Index (HCPI-Comesa).

The figure is for February 2018 and is an improvement from 10.6 percent recorded in January.

HCPI-Comesa comprises of 12 divisions of expenditure including categories on housing, water, electricity, gas and other fuels et cetera.

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The number is well below the inflation figure for the region, which stood at 19.9 percent, down from 21.5 percent in January.

The development means Malawi is faring relatively well on the rate at which prices of goods and services are increasing as compared to other countries in the 26-member regional bloc.

Locally, inflation made a historic turn to hit single digit at 9.3 percent in August 2017, the first time in six years. The movement beat Reserve Bank of Malawi’s prediction that inflation would move into the single digit lane by December 2017.

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Over the following months, the inflation rate has been stable maintaining within the single digit trajectory, only quickening to 9.9 percent year-on-year in March this year from 7.8 percent in February.

Optimism is high that inflation will now reflect consumer spending patterns after the National Statistical Office (NSO) rebased the Consumer Price Index (CPI) and, among others, reduced the weightage of food from 51 percent to 45.2 percent.

The new CPI weigh t s, according to NSO, are based on monetary expenditures relating to consumption for all households (both urban and rural) derived from the Fourth Integrated Household Survey conducted between 2016 and 2017.

But, the International Monetary Fund (IMF) has indicated that the risk of inflation reversal still remains, necessitating macroeconomic policy to continue focusing on entrenching the gains so far made.

Among other things, IMF Resident Representative to Malawi, Jack Ree, said authorities need to reign in on budget deficits, which had risen due to revenue shortfalls and spending overruns.

“The re-rise of inflation to 9.9 percent in March is not something unexpected. In fact, disinflation since July 2016, when inflation rate peaked at 23.5 percent, to end-2017 has been driven mainly by the sharp deceleration of food price amid extraordinarily suppressed maize price.

“…experts have expected inflation to rebound as maize price goes back to

more historically normal levels,” he said.

According to Ree, fighting inflation is about managing expectations and he said this would only be possible, when the market has trust on a credible policy framework.

He said the IMF’s Extended Credit Facility programme is designed to underpin this sort of credibility.

The IMF has since approved a new Extended Credit Facility (ECF) for Malawi worth $112.3 million.

The Economics Association of Malawi, speaking through its President, Chikumbutso Kalilombwe, earlier said that optimism remains as inflation maintains the single digit trajectory.

Benefits of low inflation

  • When inflation is low, consumers and businesses are better able to make long-range plans because they know that the purchasing power of their money will hold and will not be steadily eroded year after year.
  • Low inflation also means lower nominal and real (inflation-adjusted) interest rates. Lower real interest rates reduce the cost of borrowing. This encourages households to buy durable goods, such as houses and autos. It also encourages businesses to invest in order to improve productivity so that they can stay competitive and prosper without steadily having to raise prices.
  • Sustained low inflation is self-reinforcing. If businesses and individuals are confident that inflation is under long-term control, they do not react as quickly to short-term price pressures by seeking to raise prices and wages. This helps to keep inflation low.–https://www.bankofcanada.ca/wp-content/ uploads/2010/11/benefits_low_inflation.pdf
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