If there is one economic principle that Zimbabweans have been forced to become familiar with it is inflation. From the creeping to galloping inflation of the 1990s, the hyperinflation of the 2000s and the high but not hyperinflation of the late 2010s there’s not a Zimbabwean alive who can claim not to have experienced inflation. As inflation in the nation starts to trend towards the hyperinflation range again this is as good a time as any to get a full understanding of what inflation is and how it’s measured. We will also discuss hyperinflation and deflation just for a broad understanding of this beast that we are living with.
Inflation
Inflation is the general increase in prices that occurs over time. It is evidenced by comparing prices in one time period to another period. In that regard, inflation is not difficult to understand. Today’s bread costs $1, tomorrow the same bread costs $1.10, that is inflation on your face. Nothing the average Zimbabwean would be unfamiliar with here.
How is it measured?
ZimStat uses what is called the Consumer Price Index to calculate the inflation that we report on regularly here. The Consumer Price Index uses a basket of goods and services, presumably in the proportion that the participants in the economy use them or a close approximation thereof. The first step is taking a base month (our month zero) and adding up all the goods and services in the basket and arriving at a price, this will be our base 100. In all future months, we will calculate the total cost of the same basket of goods and divide this total by our base month total to arrive at an index value. We then use this to calculate a percentage change in inflation. You may have also encountered a Producer Price Index (PPI) which does the same thing but for prices of goods from the producer so excluding retail markups and other costs of bringing products to consumers. This is not a measure we use in Zimbabwe but it will come in handy a little later on.
Types
Now for the fun part; not all inflation is created equal. While we often speak of inflation as if it’s one creature it is the combination of many creatures with different characteristics.
Cost-push
Cost-push inflation is, as the name would suggest pushed onto consumers by producers. Where producers of goods and services are pushed by one factor or another to increase their prices and pass this cost on to consumers. We have in 2022 in particular seen Zimbabweans talk of imported inflation in light of the global conditions thanks to the Russia-Ukraine conflict. Imported inflation is cost-push inflation. Earlier I mentioned the producer price index and this is where it comes in handy, it will indicate what percentage of total inflation can be explained by cost-push inflation.
Demand-pull
Demand-pull inflation should give you a hint from its name of exactly what it is. This is where due to an increase in the availability of money (money supply) people have more money available to buy goods and so are willing to part with more money for the same goods. As a result, the demand for goods increases and “pulls” the price of goods “up”. It doesn’t quite feel this way when it is happening but that is long and short of it.
Built-in
Built-in or expected inflation is a change in prices that occurs because of the expectations of the general market. It differs in degree but we have seen it in Zimbabwe. Prices going up with the announcement of increases in civil service salaries is a good example of this.
Hyperinflation
Hyperinflation is not a type of inflation but rather a degree of inflation, it simply speaks to how much inflation an economy is experiencing rather than being a distinct type of inflation. There are academic thresholds for hyperinflation such as 50% per month (we’ve been there) or 150% per year (we are there) but these are just that, academic. The consensus is that hyperinflation is an extremely high rate of inflation which very quickly erodes the value of money.
Deflation
The concept of built-in inflation may seem a bit unfair but we need to consider what would happen in the absence of inflation or more specifically in the presence of deflation. Deflation is a situation where instead of prices going up they go down over time. This is not to be confused with deceleration (of inflation) where prices increase but at a slower pace (we’ve had that). So in a deflationary environment bread costs $1 today, tomorrow it may cost you 95 cents.
For the Zimbabweans who have been saddled with inflation and hyperinflation at least once in their existence the idea of deflation is appealing but do not be fooled. Deflation has dire effects on economies including suppressing (reducing) aggregate demand. Our bread example is a perishable and also a daily need but consider household durables such as a fridge. If you knew that you could get the same new fridge cheaper if you just waited a few months to buy it, there’d be no rush to buy it or anything for that matter. You should take some time to read up on Japan’s experience with deflation if you want to understand this dynamic on a deeper level. The bottom line is deflation is just as bad as high inflation.
From this discussion, we should understand that we need a little built-in inflation but would want to avoid high, chronic or hyperinflation at all costs. It doesn’t look like we will be rid of high inflation any time soon in Zimbabwe.
