Inflation sends distress signal | The Herald

via Inflation sends distress signal | The Herald January 16, 2014

THE country’s annual inflation shed 0,21 percentage points to end the month of December, 2013 at 0,33 percent due to the low level of growth in prices for goods which in turn implies that economic growth is currently facing severe challenges.

Prices of most goods have remained almost stagnant largely due to weak aggregate demand and the depreciation of the South African rand against the United States dollar. Retailers have little room to raise prices because disposable incomes are not growing due to the economy’s illiquidity.

The economy is characterised by stagnant salaries and wages with minimal adjustments being made.

Economists say the country is in a period of disinflation where prices are still rising but at a much lower rate. This usually results in a continued, but lower rate of real value destruction in money.

Generally because of the tight liquidity situation, there is an across-the-board weakness in consumer spending.

There are now concerns the economy will hit the deflation point next month if the current downward trend in inflation continues. Deflation occurs when the inflation rate reaches below zero percent. It is undesirable since it may further sterilise already fragile productive capacity. Investment may also fall, leading to further reductions in aggregate demand.

Statistics released by Zimstat show the month-on-month inflation in December stood at -0,08 percent after shedding 0,17 points from 0,09 percent the previous month.

The year-on-year food and non alcoholic beverages inflation stood at -2,20 percent whilst the non-food inflation rate was at 1,61 percent.

The month-on-month food and non-alcoholic beverages inflation stood at -0,41 percent gaining 0,19 percentage points on the November rate of -0,60 percent.

Economists say while it may be good that unlike the inflationary period one can plan and save for an asset and not fear that in a few months’ time it will be 10 times the price, the current state of affairs is not really something to celebrate from a global economic view especially considering legacy issues that were inherited from pre-dollarisation.

Most corporates found themselves with a very heavy debt burden and as such restructuring of companies has been a common trend. Consumer spending in the economy has been at a bare minimum. This in turn has negatively impacted on the volumes sold by companies against a relatively large fixed cost base. In order to survive, the firms are only producing what they can afford to sell given the circumstances in the face of cheaper imports as evidenced by the latest 39,6 percent industry capacity utilisation.

Economist Mr Joseph Mverecha told a post Budget meeting for Members of Parliament on Monday that the downward trend in inflation was likely to persist.
“By February, year-on-year inflation will be negative,” he said. “It might remain so until May or June.

Mr Mverecha said it was “very difficult” for a country to come out of deflation, pointing to Japan which has over the past decade struggled to get to the inflation level.

For Zimbabwe this is least desirable due to ever falling consumer spending power, which means less incentive for industrial production due to weak demand for its output.