Zim’s annual inflation continues to fall

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Zimbabwe’s annual inflation rate was minus 0,78 percent in November after shedding 0,78 points on the previous month’s figure, official figures released yesterday showed. This means that prices as measures by all items Consumer Price Index declined by an average 0,78 percentage points between November 2013 and November 2014. “The year on year food and non alcoholic beverages inflation prone to transitory shocks stood at minus 2,75 percent while the non-food inflations rate was 0,17 percent,” Zimbabwe National Statistical Agency reported.

Monthly inflation rate in November was minus 0,69 percent after shedding 0,58 points on the October rate of -0,11 percent.

Economists say the continuous deflation is a symptom of reduced aggregate demand and weakening of the rand against the United States dollar.

With respect to the fall in aggregate demand, the economic situation is so dire that households have limited disposable incomes for expenditure due to tightening liquidity and low salaries.

At a micro level, consumers’ demand is dampened by high taxes, economist Dr Gift Mugano said.

“At a macro level, Government expenditure is heavily constrained by limited fiscal space as the lion share of national budget goes into civil service salaries. This exacerbates the problem because these salaries are so low that they can’t stimulate demand.

“The weakening of the South African rand against major currencies in most part of this year had been a strong factor in putting pressure on pushing inflation downwards,” said Dr Mugano.

The fact that the rand is weakening means economic agents requires less United States dollars than before, thereby making it cheaper to import which is passed on to the consumers as reduction in prices thereby contributing to deflation.

This particularly so because over 60 percent of Zimbabwe’s total trade comes from South Africa.

“Hence the combined factors of weakening demand both at micro and macro level together with the depreciation of the rand has negative effect on inflation,” said Dr Mugano.

In Zimbabwe, although there are a number of factors contributing to deflation like weakening of the rand and constrained demand, the most significant cause of deflation in Zimbabwe is low aggregate demand.

It therefore means that Zimbabwe’s worries should rest more on ways of improving aggregate demand than deflation.

And in this case, the country must put in place measures aimed at raising industrial productivity, competitiveness, employment creation, creation of savings and export generation.

This can be achieved through putting in place measures to attract foreign direct investments.

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