#Ethiopia: Study Forecasts of Rising Inflation in the Coming Months: Will Policymakers Pay Attention?

Empirical pieces of evidence suggest that inflation expectations of households and enterprises affect their activities, according to an article from the International Seminar on Macroeconomics 2020,

For almost a year, Ethiopia’s national level inflation has been about 30%, and it has been in the mid-30s for the past six months.

The latest Macroeconomic report by Cepheus revealed that food items such as cereal grains, cooking oil, vegetables, and beverages continue to be the largest inflation drivers in April 2022, with all of them showing a year-on-year price increase of more than 30%. Education, utilities, and clothing have had below-average inflation of roughly 25%, whereas communications have experienced minor inflation, primarily due to stable or dropping telecom service rates.

According to the report, the huge price increases seen for global commodities such as wheat, maize, cooking oil, and petrol are closely mirrored in local retail prices. Given the importance of gasoline costs in filtering through to other domestic pricing, the decision to gradually phase out subsidies is closing the gap between global oil price trends and local retail fuel prices. Nonetheless, the report stated that there has only been a limited pass-through of world pricing, since local benzine costs are now up around 50% since the end-2020 (from Birr 22 to Birr 32 per liter), despite global oil prices rising by more than 100% over the same period (from $50 to $105 per barrel).

Rendering to the report’s analysis, while month-on-month national inflation has averaged 2.7 percent over the last year, it peaked at a recent high of 4 percent in March 2022 and has subsequently declined to 2.2 percent in April 2022. The most recent month-to-month rate from April 2022, which would normally provide the best indication of near-term trends, implies 29 percent inflation on an annualized basis.

The report’s consensus assessment on the direction of global commodity prices appears to be that they will remain elevated and maybe trend even higher due to broadening export prohibitions affecting wheat/fuel/cooking oil markets, as well as supply bottlenecks that continue to choke freight/shipping markets.

As a result, the Cepheus analysis expects considerable month-on-month price rises of 2.5 to 3.0 percent in the coming months, meaning year-over-year rates of 37-38 percent in the near future. Whereas the report’s macroeconomic outlook predicted that year-on-year inflation rates would continue to fall in the second half of 2022 as global commodity price shocks fade, the food harvest season begins, and favorable base effects (i.e., the price index’s extremely high levels last year) translate into lower year-on-year inflation rates.

While the current policy mix is reducing macro imbalances in a tough domestic and global context, there are possibly emerging concerns, according to the analysis. Cuts in government capital spending, capital goods imports, and currency supplies to the private sector, for example, would diminish long-term investment and exports, impede development, and aggravate inflation, according to the study. However, the study concludes that these are very definitely rare and ephemeral solutions employed only in the most extreme and brief of circumstances.

Inflation expectations are essentially the rate at which individuals expect prices to rise in the future (consumers, companies, and investors). They are significant because real inflation is influenced by our expectations.

Our first study on the topic reveals that, given the fact that inflation estimates are based on a specific basket of commodities and services, central bank policymakers may use inflation expectations as a policy tool to stabilize the economy.

Altogether, it will be interesting to see how Ethiopia’s policymakers use the forecast to their advantage in responding to predicted inflation hikes.

Source: Cepheus