The RBZ is moving towards inflation targets with another good reading in January 2023. While year-on-year inflation is still high at 229.8%, month-on-month inflation came in at 1.1%, marking the fourth consecutive month it has been below 5%. ZimStat delayed the announcement of inflation data to give an extended presentation, and it was well worth the wait. The additional information provided noted that over 70% of economic transactions were carried out in foreign currency. For this reason, they propose to use their blended CPI as the primary inflation measure in the future.
Year on Year
There’s no getting around that year-on-year inflation in Zimbabwe is very high. The highest in the world at present. Prices are over three times what they were a year ago based on the consumer price index basket, which is a weighted average. So, in reality, some, if not many, things are well over triple what they cost 12 months ago. The good news is inflation growth has been arrested. The January rate of 229.8 marks a six-month low for year-on-year inflation. To add to that, this marks the most significant drop (14%) since inflation started dropping in September 2022. In simple terms, inflation is slowing down and doing so more and more each month. For those looking for a pinch of salt to take with this, January has consistently been characterised by declining inflation since the change in currency regime. As we can see from the 5-year chart below, that doesn’t remain the case for the rest of the year. Time will tell.
Month on Month
If you’re looking for excellent news, this is where it is. Finance Minister Professor Mthuli said we should focus on month-on-month inflation as it reflects current economic conditions. 1.1% month-on-month inflation represents the lowest month-on-month inflation figure since September 2018. For those with a long memory, that is the month before the fateful October 2018 decision to recognise Bond notes as being separate from US dollars and lead to the ultimate devaluation that leaves the currency floundering around the 800 mark from what was then parity.
70% of transactions in USD
The most exciting highlight of the ZimStat report was that over 70% of transactions in Zimbabwe are in foreign currency. There are a lot of ways to look at this. It has long been a consensus in media circles that Zimbabwe does not have Zimbabwean dollar pricing but foreign currency pricing that can be settled in Zimbabwean dollars. While the government rejected the idea of dollarising the economy again in the 2023 National budget speech, the same institution provided US dollar pricing that can be settled in Zimbabwean dollars. In a trading update, Delta beverages had earlier reported that 70% of their income is in US dollars, and the writing was really on the wall from there. It was once said that once economies get a taste of the US dollar, they never recover from it, and we are definitely looking more like the rule than the exception.
We have spoken about the Blended CPI and how questionable it is in our opinions. Nonetheless, the prevalence of US dollar transactions in the economy has convinced ZimStat to make the Blended CPI the primary Inflation measure in the country. The Zimbabwean dollar inflation will still be published. ZimStat argues that it reflects the situation on the ground. We have been reluctant to incorporate it because it genuinely throws the cat amongst the pigeons.
A look at January year-on-year inflation, the blended CPI year-on-year inflation rate is 101.5% compared to 229.8%. That means in blended CPI terms, prices are double what they were a year ago. Month-on-month blended CPI was 0.7% compared to 1.1%. When looking at mass data, as ZimStat does it makes sense to use this measure, but when looking at the meaning of the data as users do, it doesn’t make sense. Just because 70% of transactions in the economy are US dollar-based doesn’t mean 70% of my transactions are US dollar-based.
These are interesting talking points, but the overall highlight is the containment of month-on-month inflation. In recent history, at least, January has been a bizarre month with reduced inflation compared to the month before. Will this containment continue with the pressure we have seen on the parallel market and official exchange rates?