Understanding the July 2021 inflation rate in Tanzania
Among the key macro-economic issues of discourse in Tanzania - as is in many other economies - is inflation. Among the challenges in the inflation space have included taming it at single digits. The policy target has been taming it at five percent. Tanzania has attained this mark. But, it has been a struggle, keeping in mind that we have seen strong doubledigit inflation in the history of Tanzania. Of late however, inflation has gone below the policy goal to as low as 3.0 percent in November 2018. In December 2019 it was 3.8 percent and in January 2020 it stood at 3.7 percent. In June 2021, it was 3.6 percent and in July 2021 it was 3.8 percent. The July 2021 inflation rate increase by 0.2 percent from the June 2021 rate.
Computing inflation in Tanzania
Inflation is computed using Consumer Price Index (CPI). A representative sample of consumer items used in the index. It covers rural as well as urban consumption. It covers food and non-food items. Different weights are given to different items proportional to marginal propensity to consume. In the Tanzanian context, the following are selected items in the CPI and their weight in percent in brackets. Food and nonalcoholic drinks (38.5), transport (12.5), accommodation, water, electricity, gas and other energy sources (11.6), clothes and shoes (8.3), furniture, domestic utensils and house repair (6.3), communication (5.6), restaurants and hotel expenditure (4.2), alcohol and tobacco (3.7), others (3.1), health (2.9), recreation and culture (1.6) and education (1.5). Simply said, for every Sh100 consumed, the proportions used for the items above are those in the brackets. A whole new discourse is needed in some of the prioritisations above.
July 2021 inflation
The July 2021 inflation reached the 3.8 percent mark from the 3.6 percent in June 2021. This implies that the speed of price increase in July was bigger than that of June by 0.2 percent. Food items and nonalcoholic drinks inflation increased from 4.7 to 5.1 percent. Inflation not related to food and drinks increased slightly from 3.2 to 3.3 percent. Among the contributors to the increased inflation (and the rates in brackets) include increase in prices of kerosene (5), charcoal (1.3), diesel (5.1) and petroleum (5.4).
Deflation
Deflation is reduction of the general price level. When this happens, prices will decrease. There is confusion among some people on deflation and inflation. Every time the authorities announce a decline in inflation the common comment has been as to why we are not seeing prices declining or even why we are seeing some prices increasing. Questions have revolved around the observed price hike in some food items - tomatoes and onions in particular. The general price level will decline the moment we report negative inflation. This will mean that the general price level actually went down. This is good news to consumers but not necessarily to producers.
Schools of thought
There are several schools of thoughts on inflation. The two major ones are the structural and monetary schools of thought. The former believes that inflation is due to structural issues in the economy. They include issues like inadequate infrastructure that may cause price hikes, bad weather conditions that may have negative impacts in production and distribution of goods and services. In Tanzanian types of economies this would include impacts of rainfall on food production since food carries a huge weight in the CPI. The monetarist school of thought believes that inflation is caused by too much money in supply. When too much money chases too few goods and services, the law of supply and demand sets-in and causes price hike. Tanzania’s is generally structural than monetary inflation. High inflation for example is just a crop failure away.
Imported inflation
Part of the inflation in Tanzania is due to imports from inflation-ridden trade partners. These are trade partners that are experiencing high inflation rates. Necessarily when goods and services are imported from such countries, they will be sold at higher than buying prices to cater for involved transaction costs and profit margins. ‘Imported inflation’ can also be attributed to general global commodity prices including food prices. This too is an exogenous variable that Tanzania cannot control directly. Indirectly, this can be controlled by diversifying away from importing from inflation-ridden countries. But such alternative trade partners must exist.
