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Analysis | Data | National

Explainer: Why is inflation going down but prices remain high?

Many people ask this particular question. But is it an appropriate question to ask, given what inflation means, or are there hidden factors that cause prices to remain high, which we do not know? Stay with me as we explore the various dimensions this question evokes.

First, let us understand what inflation is. It can be defined in two ways- what the economists call nominal and real terms.

Inflation in nominal terms refers to the overall increase in the prices of goods and services over time. It measures the rate at which the general level of prices for goods and services is rising.

Boring right? Let us take a look at the real term definition; inflation in real term is the decrease in the purchasing power of a currency over time. It measures how much value a currency loses over time due to a general price increment.

Let us consider this; a year-on-year inflation rate of 50% in real terms means that, if you were able to buy two oranges in the previous year at GHȼ1, now you can only buy 1 orange because you have lost half of the oranges GHȼ1 can buy, due to the 50% year-on-year inflation. Simple right?

We proceed to answer our question now that we know what inflation is. Before that, did you notice what both the nominal definition of inflation and the real definition had in common? They both made references to “general prices”.

This suggests that inflation is a broad measure and considers the average price changes across various goods and services. While overall inflation might be decreasing, certain sectors or industries could be experiencing inflationary pressures due to specific factors like increased demand or higher production costs. Are we making progress? Great! Stay with me.

The concept of decreasing inflation

A situation where inflation is decreasing, but prices remain high can be attributed to a phenomenon known as “disinflation” or “stagflation”. Disinflation is a slowdown in the rate of inflation (does not mean decreasing prices). It means that average prices are still rising but at a decreasing rate.

If a year-on-year inflation for a previous month was 40%, a current year-on-year inflation rate of 35% means there is a disinflation of 5%. This can be likened to the speed of a car. If a car is moving at a speed of 60kmh and the speed increases to 66kmh that is inflation.

If the speed had decreased rather to 50kmh that would have been a disinflation. This does not mean the car is not moving. It is moving but at a slower pace. This is disinflation. Average prices are still rising but at a slower pace. A real example is what Ghana experienced in the last five months of 2023. But what if the car is reversing what do you call that? Great question let’s explore that too.

Decreasing prices

The reversing car, in this case, is called “Deflation”. This is the direct opposite of inflation. We tend to confuse this with disinflation. Deflation refers to the general decrease in the prices of goods and services. It also leads to an increase in the purchasing power of a currency over time meaning that at a 50% deflation, if 1 orange cost GH1 in the previous year, now GHS 1 can buy 2 oranges.

Deflation occurs when inflation is a negative number example, when the inflation figure is -40% or -10%.

The true measure of current and present happenings

Now that we have an understanding of why a slowdown in inflation does not necessarily mean prices should fall, let’s look at how we can know the current happenings in terms of inflation and price changes.

Month-on-Month (MoM) Inflation

This measures the percentage change in prices from one month to the next. It provides a short-term perspective on inflation trends. Month-on-month (MoM) inflation is like taking a quick snapshot of how prices are changing from one month to the next. It tells us if things are getting more expensive or cheaper right now. For example, if last month a gallon of milk cost GHȼ30, but this month it's GHȼ33, that's a sign of MoM inflation. If MoM inflation is high, it means prices are going up quickly right now.

Year-on-year (YoY) Inflation

This measures the percentage change in prices over a 12-month period. It gives a more extended and stable view of inflation, smoothing out short-term fluctuations. This provides a broader perspective, indicating the overall trend in inflation over a more extended period. It helps in understanding the sustained impact of economic factors on prices.

The author, Anthony Manu, is a data and research analyst at The Multimedia Group.

Contact: Anthonymanu290@gmail.com

DISCLAIMER: The Views, Comments, Opinions, Contributions and Statements made by Readers and Contributors on this platform do not necessarily represent the views or policy of Multimedia Group Limited.


DISCLAIMER: The Views, Comments, Opinions, Contributions and Statements made by Readers and Contributors on this platform do not necessarily represent the views or policy of Multimedia Group Limited.



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