Understanding the July 2021 inflation rate in Tanzania

Economics

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.

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.