Inflation Hits Record Low in Two-Years

Ninth consecutive month of single digit inflation

Last month saw a record low inflation rate of 5.6pc, since the onset of the worst drought in years and the wave of popular unrest approximately two years ago. It has been nine months since the country managed to report successive single digit inflation rates.

Inflation,measured by the consumer price index, rose to 5.6pc in October, after stepping up at 6.9pc in September. This means that a basket of goods and services that would have cost 100 Br in November 2015 cost 105.6 Br last month.

Last month, a week after the Irrecha incident, vegetables showed an increase of between nine and 110pc. The situation then reversed to the same conditions that were present before the incident. Overall, month-to-month inflation, which measures the retail price of the two latest months, saw a one percent decline compared to October 2016. This indicates that spending was one percent lower last month compared with September 2016.

Some experts, however, are taking the news with caution.

“The fall in inflation doesn’t necessarily mean that the economy is stable,” said Naod Mekonnen, an economic and development policy researcher at Addis Abeba University.

He rather frames the argument as a symptom of an economic slowdown.

A slowdown in the economy means a fall in the rate of economic growth. This could lead to lower export demand, cheaper commodity prices and a fall in economic confidence. Besides that, the shortage of foreign currency reserves observed over the past several months has already forced many businesses to slow down their activities in sectors where production depends on imported materials.

A month ago, the International Monetary Fund warned all nations across the world to take urgent action to reverse a slowdown in trade and stop low inflation from triggering a downward spiral of weakgrowth, job cuts and higher debt.

Under the auspices of the declined general price index, food item prices are reported to have seen a 3.4pc rise in October compared to the same time last year. This figure was 6.1pc during September 2016.

The non-food category, consisting of clothing, construction materials and household goods, has seen the reverse of this trend  jumping up to 8.2pc last month. This shows that non-food items have increased at a higher rate than food items.

Among the items reviewed under the food and non-food price index,cement exhibited a significant decline in the month of October compared to the same period last year.

Currently, the average retail price of cement is 117.5 Br for 50 kilograms.

“This is due to excess production capacity and weak demand,” an insider in one of the two factories told Fortune.

The competition in the sector has reached a point where it directly affects price. Besides the two top players, the Dangote and Derba Cement Factories, there are 20 factories. Currently the countries annual production capacity has reached over 15 million tonnes, while neighbouring Kenya stands at 6.3 million tonnes.

In Ethiopia, the highest rate of inflation was recorded in July 2008 at 64.2pc. This was induced by a huge cash injection by the state. The following year, conversely, it hit the record low of 4.1pc below zero inflation.

Inflationary pressure was challenging the overall economy during the first two years of the first Growth  Transformation Plan(GTP)implementation, in which general inflation increased to 38pc in 2010/11 and 20.8pc in 2011/12. It was brought down to 13.5pc in 2012/13 and 8.1pc in 2013/14.

The average annual inflation rate for the final year ofthe GTP(2014/15) is estimated to have been 7.6pc – 0.5 percentage points lower than the previous year level. Last year, however, the country experienced a three-year high of 9.6pc annual inflation. This is 1.6 percentage points higher than the target of the government.

During the same period, the country experienced a downturn in the economy, largely due to the fall in export revenue, hike of import prices and drought, which affected the productivity of the country.

Last year, the country imported over 21 billion Br worth of products – 27pc higher than the preceding year. Export earnings dropped from three billion dollars in 2014/15 to 2.8 billion dollars.

Last year, the IMF estimated the Growth Domestic Production of the country, which was adversely affected by drought, to be 736 billion Br. This figure is 6.5pc higher than the 2014/15 fiscal year. The registered growth was the lowest in a decade.

Recently, the Fund projected that the country’s economy will pick up by the end of 2016, reaching 7.5pc GDP growth.


Published on Nov 15,2016 [ Vol 17 ,No 863]



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