Inflation drops amidst anxiety

* Eleventh monthly fall in inflation raising hopes of further rate cut
* But utility, public sector wage hikes could reverse trend

By Ekow Essabra-Mensah

Headline inflation rate declined for the 11th consecutive month by almost one percentage point, in May 2010, amidst anxieties of inflationary pressures being built by recent massive increases in utilities tariffs, which took effect beginning June.

The May inflation rate dropped to 10.68 percent, a further decline of 0.98 percentage points from the April figure of 11.66 percent, from latest figures released by Ghana Statistical Service (GSS).

Current downward pressures on the Consumer Price Index (CPI) were driven general by both the food and non-food sectors, but the food component, which constitutes 44.91 percent exerted much more pressure with a 1.12 percentage decline from the April figure as compared to the 0.84 decline registered in the non-food component for the same period.

Dr. Grace Bediako, Government Statistician, briefing the media in Accra, explained that the items in the non-food basket such as recreation and culture (30.81%), hotels and restaurants (20.75%), alcoholic beverages, tobacco and narcotic (20.39) were among the non-food sub group that recorded high inflation rates above the group average of 14.98 percent.

“The current fall puts inflation at its lowest level since December 2007 and leaves the West African frontier economy in line to reach single digit well before the central bank's end-of-year target,” she said.

Analysts however contend that with electricity tariffs hiked up by 89 percent and water also going up by 36 percent, inflationary pressures are bound to build up.

“Aside of the average of 42 percent increase in electricity bills that domestic consumers are to be confronted with at the end of June, most consumers will have to bear the additional burden of pass through costs on products of producers who mainly use electric energy in their production processes,” said analyst.

Government officials have attributed the continuous drop in the inflation rate to the effects of government’s relatively tight fiscal and monetary policies and the stability of the cedi against major trading currencies in the past quarter.

Inflation slowed from 20.7 percent in June after the cedi closed down its decline against the dollar. The cedi, which declined 15 percent against the dollar in the first half of 2009, rose 4.5 percent in the second half of the year and is little changed this year.

With the consistently declining inflation rates there is increasing possibility of further interest rate cuts by the Bank of Ghana (BoG) next month.
The BoG lowered its policy rate to 15 percent in April and has cut a total of 3.5 percentages points since November.

The outlook, as assessed by the BoG, points to lowering inflationary risks, an indication that the real value of money will continue to rise, and banks would become more willing to reduce lending rates.

In the previous year, the rate of inflation, which stood at 18 percent in October 2009, declined to 16.9 percent in November and then to 15.9 percent in December 2009.
Meanwhile, government says it is on course to achieving its stated objective of single digit inflation this year as inflation rate continues to record falling rates.
The government’s end of year inflation target is pegged at 9.2%.

“Government's sound macroeconomic policy characterised by fiscal and monetary prudence in 2009 and 2010 has kept inflation expectations well anchored,” Dr. Kwabena Duffuor, Minister of Finance and Economic Planning has said.