July inflation slows to 9.46 percent

Headline inflation for the month of July dropped marginally to 9.46 percent, a further decline of 0.06 percentage points from the June figure of 9.52 percent, latest figures released by Ghana Statistical Service (GSS) have shown.

The current fall is the 13th consecutive time that the country’s inflation rate has declined, paving the way for a further policy rate cut by the Bank of Ghana – which has indicated it signals continuous stability of the real value of money and makes banks more willing to reduce lending rates. Last month, the policy rate was reduced by 150 basis points to 13.5 percent.

The fall in the rate also puts inflation at its lowest level since December 2007 and, if the trend persists, leaves the West African frontier economy in line to firmly achieve a key criterion for the implementation of the Eco – the regional currency unit being pursued by the West African Monetary Zone (WAMZ).

Current downward pressures on the Consumer Price Index (CPI) were driven generally by both the food and non-food sectors, but the non-food component, which constitutes 55.09 percent, exerted much more pressure with an increase to 11.96 percent from the June figure of 11.89 percent, as compared to food component which represents 44.91 percent and recorded 5.84 percent inflation after increasing to 6.13 percent in June.

Dr. Grace Bediako, Government Statistician, briefing the media in Accra, explained that the items in the non-food basket such as alcoholic beverages, tobacco and narcotics (18.71%), hotels and restaurants (17.13%), clothing and footwear (16.53%) and housing, water, electricity and gas, were items in the non-food sub-group that recorded high inflation rates above the group average of 12.20 percent.

Government has 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.

A statement from the Ministry of Finance and Economic Planning said inflation rate for July dropped despite the over 50 per cent increase in government expenditure in 2010

The statement said the notion that government was holding back payments to creditors which had caused the inflation rate to decline and was also starving commercial banks of cash inflow, thereby making it difficult for the banks to reduce their lending rates was not only false but a complete misrepresentation of the facts. “Contrary to what the critics believe in, Government expenditure is rather on the increase,” it added.

The ministry explained that inflation reached 18.1 per cent in December 2008 as a result of demand pressures arising from the fiscal expansion stance of the previous government and rising crude oil prices.

It said this led to a build-up of strong inflationary pressures in the economy, which caused the inflation rate to continue to rise in the first half of 2009, reaching an all time high of 20.7 per cent in June.

The statement said the inflation was also fuelled by the weakened domestic currency, which lost more than 30 per cent of its value against the dollar between July 2008 and June 2009.

However, it said since June 2009, the inflation rate had been on a steady decline, reaching 16 per cent in December 2009, and by June this year, the inflation rate had dropped to 9.5 per cent and expected to reach at least seven per cent by December this year.

On course to achieving single digit, The Vice President, John Dramani Mahama, says government is on course to achieving eight percent single digit inflation by December 2010 as inflation continues its downward trend. The government’s end of year inflation target is pegged at 9.2%.

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 that year and is little changed this year.

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.

The possibility of further easing of inflationary pressures, according to analysts, hinge on more favourable food prices and continuous exchange rate stability – two factors that have been key to sustaining the current trend.

Some analysts however contend that the implementation of the Single Spine Salary Structure (SSS) coupled with crude oil price dynamics on the global front will serve as upside risks to the current trend of inflation.

The Bank of Ghana is expected to take a cue from this further fall as it monitors closely events in the economy, in anticipation of the Monetary Policy Committee’s deliberations in September.

Private sector and business sentiments are also likely to improve as they look forward to the banking sector to lower lending costs in line with the spate of macro stability and the fall in cost of mobilizing funds and deposits.