Inflation is defined as the rising cost of goods and services over time. Inflation erodes the purchasing power of people in business, consumers, governments, etc. In simple terms, the same currency today buys less in the future. Dean Baker explained inflation as ‘too much money chasing too few goods and services”.
Causes: Inflation is caused by various factors, the most common ones being demand or cost driven.
Demand-pull inflation – This arises when the demand for certain goods and services is greater than the economy’s ability to meet those demands. Over time, demand exceeds supply hence there is upward pressure on prices, causing inflation.
Cost-push inflation – When there is a disruption in the supply of goods and services, prices are pushed higher by cost-push inflation. With less supply but unchanged or higher demand, companies raise their prices, pushing up inflation.
World over, inflation in the recent past (2020-2022) has been exacerbated by various governments’ responses to the coronavirus pandemic, causing sudden increases in demand as lockdown restrictions were removed.
Additionally, inflation in different countries has been highly influenced by developments in the global economic environment. Crude oil is a major economic input, so a rise in oil prices has largely contributed to inflation. As fuel prices rise, so too does the cost of goods and services.
Inflation in Uganda: The persistent increase in food prices and fuel has pushed Uganda’s annual inflation to double digits, thus the 10.7% mark. It is the highest reading since July 2012, mainly on account of the prices of food & other products. The Uganda National Bureau of Statistics revealed that the inflation as measured by the consumer price index for the 12 months to October 2022, increased tremendously.
Core consumer prices in Uganda increased 8.90 percent in October of 2022 over the same month in the previous year. The Inflation Rate in Uganda is expected to be 11.30 percent by the end of this quarter, according to Trading Economics global macro models and analysts’ expectations. The Bank of Uganda lifted its benchmark interest rate by 100 bps to 10% to try to tame soaring inflation and boost the shilling.
source: tradingeconomics.com
Inflation is affecting all economies in the world. Narrowed down to the East African Community, all countries have been adversely affected by high inflation. Statistics from Kenya, Tanzania, Rwanda, and Burundi indicate that all these countries are adversely affected. Therefore, governments as well as the populace have to devise strategies to cope with rising prices to spur economic growth.
source: tradingeconomics.com
Kenya: The annual inflation rate in Kenya accelerated for the eighth straight month to 9.6% in October of 2022, from 9.2% in September and above market forecasts of 9.5%. It was the steepest inflation rate since May 2017.
source: tradingeconomics.com
Tanzania: Tanzania’s annual inflation rate rose for the seventh straight month to 4.9% in October of 2022, from 4.8% in the prior month. A higher inflation rate than that was recorded in October 2017 mainly underpinned by soaring prices.
source: tradingeconomics.com
Rwanda: October Inflation Rate Hits Highest Since 1997
The annual inflation rate in Rwanda climbed further to 31 percent in October of 2022 from 23.9 percent in September 2022. It was the highest inflation rate since at least January of 1997.
source: tradingeconomics.com
Burundi: Inflation Rate in Burundi increased to 20.92 percent in September from 19.57 percent in August of 2022.
Coping mechanisms under inflation
Macro level
- Governments should apply the monetary and fiscal policiesto Curb Inflation, e.g. by reducing tariffs that push up the price of goods
- Promote Work, Savings, and Investment
- Governments should improve the “quality” of public spending. Countries, especially those in the developing world should improve their spending quality by making public spending more performance-oriented and managing debt more effectively to reduce debt service costs.
Micro level – Businesses, individuals etc:
- Minimize unnecessary costs e. Cut expenses when and where possible. Reduce wherever you can, advises Bradley Katz, CEO and co-founder of Axon Optics. For example, organizations can use a hybrid remote/in-office model that allows the flexibility to move to a smaller, less expensive office. At individual/household level, limit the spending to critical items. Try backward linkages e.g. grow own food to reduce costs of feeding your family (for those that have the capacity). Set spending priorities, cut back on energy bills (use energy saving devises), shop for cheaper alternatives.
- Invest and diversify the Portfolio – don’t put all eggs in one basket e.g. invest in stocks, bonds, and other assets can help minimize your losses if one investment doesn’t perform well. Also, under a high inflationary environment, one should continue to look to investments as a means to generate higher returns above of the rate of inflation. This will help mitigate the depreciative effects of inflation on the wealth of a company or individual.
- Don’t hold excess cash. Inflation diminishes the value of your money over time. Instead, put all of your excess cash in investments such as real estate and alternative assets that give a higher return than the inflation rate.
- Substitution: Consider substituting materials (businesses in production).
- Automation: Streamline and automate processes.
- Outsource: Consider outsourcing the non-core functions of your business.
- Switch to a high-yield savings account – discuss with you bank. Although it may not be possible to make up all losses in value to inflation, at least one would not lose as much value as you would stashing money in a home safe or basic savings account.
- Consider a side gig.
By Dativa N.
14th November 2022
