Year on year inflation closed the year of 2021 on a rather bittersweet note. While the 60.74% was up on the previous month for a 4th consecutive month, it was much lower than what had become the norm a year ago. Month on month finished the year higher than average though marginally lower than the previous month. The Minister of Finance and the team in charge will certainly be disappointed by failing to meet both the initial optimistic target of below 10% and the revised target of below 55%. Of course, there are factors behind the inflation trend which we will look at.
Zimbabwe started the year with very high inflation rates. The graph shows clearly that where we are is much better than where we were. The major reason for this victory was the containment of money supply growth by the Reserve Bank of Zimbabwe as compared to previous years. The drop in inflation has taken Zimbabwe from the second-highest inflation rate in the world (behind Venezuela) in 2020 to the current 6th. The United States of America was recently sent into panic as annual inflation there was recorded over 6%. Our inflation is still very high with incomes rising nowhere near as fast or not at all. The silver lining to the cloud is that the rate of increase slowed down in what we hope is a reversal of the trend and not just an anomaly.
The month on month picture presents a more confronting image. It would tell us that we are back to where we were a year ago. Albeit from a lower base hence the shocks are not as big. Of course, there is the festive season effect to consider in all this as it also reared its head towards the end of 2020. Credit must go to the authorities. In 2020 Month on month inflation peaked at 40% while in 2021 it was contained to a high of 6.4%. And these changes are not just academic, it is evident on the street that price increases are fewer and further between as well as being less extreme.
Why is this happening?
After slashing inflation down from around 800% down to 50.24% things were looking very good. Yes, prices were still rising but at a much slower rate. So what went wrong? How we have started to experience an increment in the inflation rate again. We have discussed before how there is little to no Zimbabwean dollar pricing in Zimbabwe but rather US dollar pricing that is translated to Zimbabwean dollars. We have long accepted that for many people in business the parallel market is still the most reliable source for foreign currency. Foreign currency is attractive as both a medium of exchange for those who must import and a store of value for savings. With the parallel market rate doubling over the year after exhibiting some stability towards the end of 2020 the knock-on effect on inflation was inevitable. The parallel market rate rose sharply in December contributing further to the festive effect. The Reserve Bank Auction closed for its annual break and it is widely accepted that companies had no choice but to turn to the parallel market which placed upward pressure on the rate. All eyes will be keenly on the auction when it resumes.