ECONOMY OF GHANA II - WordPress.com OF GHANA II INFLATION IN GHANA Economy of Ghana Lecture Notes by...

ECONOMY OF GHANA II

INFLATION IN GHANA

Economy of Ghana Lecture Notes by Dr. Emmanuel Codjoe 1

Inflation in Ghana

Inflation in Ghana – Trends and Analysis

• In our earlier discussion on monetary policy we noted that one of the main functions of the Bank of Ghana is to formulate and implement monetary policy aimed at achieving the objectives of the Bank, as well as promote by monetary measure the stabilisation of the value of the currency within and outside Ghana.


Inflation in Ghana


The key point to note is that the Bank of Ghana has now been granted the legal powers to fight inflation through measures and interventions it deems necessary and appropriate.


Inflation in Ghana


This is however a feature that is recent is fairly recent. The emphasise on the Bank of Ghana to fight inflation is in line with recent developments in international monetary economics as well as changes to the role of central banks globally.


Inflation in Ghana

Who/What at all is this animal called Inflation?

Inflation or more appropriately, the rate of inflation (inflation rate), is a measure of the rate at which average prices change in an economy over a period time.


Inflation in Ghana


More specifically, the rate of inflation measures the rate at which the average price level increases over a period time, usually a year.

Consequently, inflation may be simply defined as a sustained and persistent increase in the price level.


Inflation in Ghana


Note that the opposite of inflation is deflation, where we observe a sustained decrease in the price level over time.

A recent example occurred in the U.K. For more on this, here is a link to a news item on that.

http://www.telegraph.co.uk/finance/economics/11614740/Its-official-Britain-is-in-deflation.html















Inflation in Ghana


Here a note of caution is important!

As stated above, the opposite of inflation is deflation.

Nonetheless, when the term inflation is used, note that we are referring to price level increases.


Inflation in Ghana


Inflation is usually regarded as bad news. This is because of the following (Jahan, Sarwat):

• It erodes savings, •Discourages investment, •Stimulates capital flight (as domestic investors put

their funds into foreign assets, precious metals, or unproductive real estate),


Inflation in Ghana


• Inhibits growth,

•Makes economic planning a nightmare, and,

• In its extreme form, provokes social and political unrest


Inflation in Ghana


What the inflation rate does indicate or report is the rate at which this increase occurs over a period of time.

So, a decrease in the inflation rate from 10% to 5% does not mean the average prices have declined. It only means the rate at which the average prices are rising have reduced from 10% to 5%.

Also, inflation does not imply high prices. It only means prices are rising at some rate.


Inflation in Ghana


Another point worth noting is that the inflation rate is computed using the notion of the average price level. This average is based on a basket of goods and services consumed by representative households in the economy.


Inflation in Ghana


Hence, not all goods and services are included in this basket.

Consequently, the effects of changes in prices will affect different households, differently.


Inflation in Ghana

Measuring the Rate of Inflation:

The common measure of the rate of inflation is the rate of change in the consumer price index.

The Consumer Price Index (CPI) measures the change over time in the general price level of goods and services that households acquire for the purpose of consumption.


Inflation in Ghana Measuring the Rate of Inflation:

In Ghana, the computation of the rate of inflation is undertaken by the Ghana Statistical Service, which publishes the inflation rate on a regular basis – usually monthly. The major components for the computation have been divided into Food (and Non-Alcoholic Beverages) and Non-Food items. This distinction allows for a better understanding of the inflationary pressures within the economy.


Inflation in Ghana

Measuring the Rate of Inflation:

Food and Non-Alcoholic Beverages include: Vegetables including potatoes and other tuber vegetables; Bread and cereals; Fish; Fruit; Meat; Milk, cheese and eggs; Oils and fats; Food products n.e.c.; Sugar, jam, honey, syrups, chocolate and confectionery; Mineral waters, soft drinks and juices; Coffee, tea and cocoa


Inflation in Ghana Measuring the Rate of Inflation:

Non-Food include: Hotels, cafés and restaurants; Clothing and footwear; Furnishings, household equip. etc; Health; Transport; Housing, water, electricity, others; Recreation and culture; Alcoholic beverages etc; Miscellaneous; Education; Communications


Inflation in Ghana

Inflation Trends, 1965 - 2014


Inflation in Ghana Inflation Trends, 1965 – 2014

In the immediate years after independence the country encountered very little inflationary pressures.

But from 1964 when the country began to encounter balance of payments problems, inflationary pressures began to build up in Ghana.

But since 1970 inflation has continued to present itself as a major economic problem in Ghana.


Inflation in Ghana

Inflation Trends, 1965 - 2014


Inflation in Ghana


Inflation in Ghana Inflation Analysis – why inflation?

In recent years however, the country has not experienced the episodes of high inflation experienced throughout the mid-1970s to the end of the 1990s.

There is now a generally accepted view/consensus that macroeconomic stability is essential in the process of economic growth and development.

Thus, several government administrations have pursued policies aimed at ensuring macro-stability.


Inflation in Ghana Inflation Analysis – why inflation? Consequently, both the Bank of Ghana and the

Ministry of Finance, and other related state MDAs as well as other public policy NGOs have continually spoken of the need to maintain macroeconomic stability. Improved policy measures, such as the setting up of

the Monetary Policy Committee (MPC) of the Bank of Ghana and the pursuance of a single-digit inflation targeting regime appear to have helped in this regard.



Inflation targeting has been used in monetary policymaking for over 25 years.

Nevertheless, there is dispute over its true effects on macroeconomic performance, as measured by lower inflation and reduced inflation and/or output volatilities.

Let’s look at Ghana’s recent trends in inflation since the 1990s.


Inflation in Ghana

0

10

20

30

40

50

60

70

80

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Infl

atio

n R

ate

(%

)

Year

Year - on - Year Inflation: 1990 - 2015



In general inflation may result from Demand pressures (Demand-Pull) or supply (Cost-Push) pressures.

Demand pressures result when there is an increase in Aggregate Demand for any existing Aggregate Supply conditions.

Supply/Cost pressures arise from factors that result in an increase in the cost of production for firms.


Inflation in Ghana

Inflation Analysis – why inflation?

Despite these demand and supply pressures discussed earlier, the main arguments put forward to explain inflation can be distinguished into the Monetarists and Structuralists camps.

Monetarists contend that inflation is a monetary phenomenon; a rise in the money in circulation causes prices to rise resulting in inflation.


Inflation in Ghana

Inflation Analysis – why inflation?

Structuralists contend that inflation is the result of structural rigidities (bottlenecks) that characterise many developing-country economies. These rigidities largely constrain supply within these economies thus pushing up prices.


Inflation in Ghana

Inflation Analysis – Drivers of Inflation in Ghana

Money supply

Domestic food (cereal) production

Exchange rate

Imported inflation and oil prices

Inflation inertia


Inflation in Ghana

Inflation Analysis – The Fight Against Inflation in Ghana

We have previously noted that the Bank of Ghana, through its Monetary Policy Committee (MPC) is in charge of the fight against inflation in Ghana.

The principal framework that the fight against inflation is done is via the inflation targeting approach.


Inflation in Ghana


In this framework, the Central Bank estimates and makes public a projected or “target”, inflation rate, and then attempts to steer actual inflation toward that target, using tools as interest rate changes (Jahan, Sarwat).

Advocates of inflation targeting think this leads to increased economic stability (ibid).


Inflation in Ghana


Inflation targeting was adopted because other measures to fight inflation, such as the control of the money supply or the value of the domestic currency in relation to another, presumably stable currency (such as US Dollar or British Pound).


Inflation in Ghana


Initially, many central banks targeted the money supply to control inflation. But this approach works well if the central bank can control the money supply reasonably well and if the money growth is stably related to inflation over time (ibid).


Inflation in Ghana


But monetary targeting had limited success because the demand for money became unstable – often because of innovations in the financial markets(ibid).


Inflation in Ghana


Consequently, many countries with flexible exchange rates began to target inflation more directly, based on their understanding of the links or ‘transmission mechanism’ from the central bank’s policy instruments, such as interest rates, to inflation(ibid).


Inflation in Ghana Inflation Analysis – The Fight Against Inflation in Ghana

To illustrate this transmission mechanism, suppose the central bank tightens, borrowing costs rise, consumers are less likely to buy things they would normally finance, such as houses and cars, and businesses are less likely to invest in new equipment or buildings.


Inflation in Ghana


The effect is a reduced level of economic activity that would be consistent with lower inflation because lower demand usually means lower prices.


Inflation in Ghana

0

5

10

15

20

25

30

No

vem

ber

20

- 2

1, 2

00

2

Jan

uar

y 2

2 -

24

, 20

03

Mar

ch 1

9 -

21

, 20

03

May

21

- 2

3, 2

00

3

July

16

- 1

8, 2

00

3

Oct

ob

er 8

- 1

0, 2

00

3

Dec

emb

er 1

0 -

12

, 20

03

Feb

ruar

y 1

8 -

20

, 20

04

May

18

- 2

0, 2

00

4

Au

gust

17

- 2

0, 2

00

4

No

vem

ber

9 -

12

, 20

04

Jan

uar

y 1

7 -

21

, 20

05

Mar

ch 2

2 -

24

, 20

05

May

24

- 2

7, 2

00

5

July

20

- 2

2, 2

00

5

Sep

tem

ber

7 -

9, 2

00

5

No

vem

ber

22

- 2

5, 2

00

5

Jan

uar

y 2

5 -

30

, 20

06

Mar

ch 2

1 -

24

, 20

06

May

16

- 1

9, 2

00

6

July

25

- 2

8, 2

00

6

Oct

ob

er 1

0 -

13

, 20

06

Dec

emb

er 1

3 -

15

, 20

06

Mar

ch 1

2 -

16

, 20

07

May

14

- 1

8, 2

00

7

Au

gust

21

-2

4, 2

00

7

Oct

ob

er 1

5 -

19

, 20

07

Jan

uar

y 2

1 -

25

, 20

08

Mar

ch 1

0 -

14

, 20

08

May

19

- 2

3, 2

00

8

July

14

- 1

8, 2

00

8

Oct

ob

er 2

1 -

24

, 20

08

Feb

ruar

y 1

7 -

23

, 20

09

May

6 -

8, 2

00

9

July

14

- 1

7, 2

00

9

Sep

tem

ber

16

- 2

2, 2

00

9

No

vem

ber

16

- 1

8, 2

00

9

Feb

ruar

y 1

5 -

17

, 20

10

Ap

ril 1

2 -

14

, 20

10

July

12

-1

6, 2

01

0

Sep

tem

ber

13

-1

7, 2

01

0

Dec

emb

er 6

- 1

0, 2

01

0

Feb

ruar

y 1

4 -

18

, 20

11

May

9 -

13

, 20

11

July

4 -

6, 2

01

1

Au

gust

29

- S

epte

mb

er 1

, 20

11

Oct

ob

er 1

7 -

19

, 20

11

Dec

emb

er 1

9 -

21

, 20

11

Feb

ruar

y 1

3 -

15

, 20

12

Ap

ril 1

1 -

13

, 20

12

Jun

e 1

1 -

13

, 20

12

Sep

tem

ber

10

- 1

2, 2

01

2

No

vem

ber

12

- 1

4, 2

01

2

Feb

ruar

y 1

1 -

13

, 20

13

May

20

- 2

2, 2

01

3

July

29

- 3

1, 2

01

3

Sep

tem

ber

16

- 1

8, 2

01

3

No

vem

ber

25

- 2

7, 2

01

3

Feb

ruar

y 5

- 6

, 20

14

Mar

ch 3

1 -

Ap

ril 2

, 20

14

Sep

tem

ber

16

- 1

8, 2

01

4

No

vem

ber

10

- 1

2, 2

01

4

Feb

ruar

y 1

6 -

18

, 20

15

May

11

- 1

3, 2

01

5

July

13

- 1

5, 2

01

5

Sep

tem

ber

11

- 1

4, 2

01

5

No

vem

ber

13

- 1

6, 2

01

5

Jan

uar

y 2

2 -

25

, 20

16

Po

licy

Rat

es (

%)

MPC Meeting Dates

BOG Policy Rate (Prime Rate), November 2002 - November 2015


Inflation in Ghana

0

5

10

15

20

25

30

35

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Infl

atio

n a

nd

Mo

net

ary

Po

licy

Rat

es (

%)

Year

Co-Movements in Inflation and Monetary Policy Rates: 2002 - 2015

INF-Year-On-Year End of Year Policy Rate


Inflation in Ghana


The Basics of Inflation Targeting:

• Inflation targeting is a monetary policy strategy used by central banks for maintaining prices at a certain level or within a specific range.


Inflation in Ghana


The Basics of Inflation Targeting:

•Central bank forecasts the future path of inflation and compares it with the target inflation rate (determined by government and central bank).

•Difference between forecast and target determines how much monetary policy has to be adjusted.


Inflation in Ghana Inflation Analysis – The Fight Against Inflation in Ghana

• In the case of Ghana, there is usually a 2 percent band about the inflation target that is determined as appropriate for the economy by the government and central bank. •The objective here is one of achieving a single digit inflation rate.


Inflation in Ghana


What is Required?: Inflation targeting requires to things. •A central bank able to conduct monetary policy with

some degree of independence. Bear in mind, no central bank can be completely independent of government influence.


Inflation in Ghana


What is Required?: Inflation targeting requires to things. • The second is the willingness and ability of the

monetary authorities not to target other indicators, such as wages, the level of employment, or the exchange rate.


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