Inflation Surges as Global Economies Breathe Fire Post-Pandemic

To prevent prices spiraling out of control, a lot of this will depend on how long the accommodative monetary policy stance of the Bank of Botswana holds and the timing of the government’s implementation of its assortment of pandemic relief programmes.

Inflation Surges as Global Economies Breathe Fire Post-Pandemic

To prevent prices spiraling out of control, a lot of this will depend on how long the accommodative monetary policy stance of the Bank of Botswana holds and the timing of the government’s implementation of its assortment of pandemic relief programmes.

 

Botswana’s headline inflation surged by 0.8 percent to 3.2 percent between February and March 2021, snapping a record-breaking sequence of 17 consecutive months below the Bank of Botswana’s 3-6 percent medium-term objective range. On a year-on-year basis, inflation is a full percentage up from the March 2020 level. While a 3.2 percent level might be encouraging in as far as the central bank’s objectives are concerned, perhaps what is more important is exploring the factors that led to such an increase and what is likely to happen, given both domestic and global economic trends.

To understand the trajectory and state of Botswana’s inflation conditions, we are going to look at the different types of inflation. It should be noted, however, that some of these are interlinked and it can be therefore be difficult to pinpoint the exact drivers behind inflation. It is perhaps for this very reason that economists seldom agree on the right medication to resuscitate an ailing economy – different views abound and are almost all correct!

Forecasting inflation can be murky business as well, with so many moving variables at play with differing degrees of impact. Add to that unforeseen global events like conflicts, cargo ships stuck in canals, actions of supply cartels and bizarre government policies, and inflation forecasting becomes quite a complicated endeavour indeed!

Demand-pull inflation is the general increase in prices caused by excess demand for goods and services. Globally, as COVID -19 pandemic related business restrictions are eased and vaccination rollout generally picks up momentum, both business and consumer demand recovers. As governments and central banks continue with accommodative fiscal and monetary policies of increased spending, economic relief programmes and low interest rates, businesses are motivated to borrow more for capital investment and consumers’ discretionary spending habits pick up too. All this increased demand spurs an increase in the cost of living, i.e. higher prices of goods and services. On an aggregate basis, global inflation dropped outside the lower bounds of target ranges during the pandemic as demand shrank, giving many central banks like the Bank of Botswana enough breathing space to continue with accommodative policies, at least in the medium-term.

Cost-push inflation occurs due to a rise in the prices of factors of production. As producers face more costs due to labour action of workers, disrupted raw material supply lines, tariffs and levies, and general scarcity of raw materials, they will pass on these costs along the supply chain to buyers – wholesalers, governments and so on – who will in turn recover their margins by charging the final consumer more.

As standard procedure to boost their respective national GDPs, the Organisation of Petroleum Exporting Countries (OPEC) routinely agrees to reduce crude oil production in member countries, thereby constricting global supply which eventually leads to higher fuel prices for end users. One of the drivers for the recent surge in global energy inflation has been the increased transport costs relating to the shortage of containers as shipping and freight companies cited low container supply due to disruptions to shipping schedules due to the COVID-19 pandemic. All these disruptions, shrinking profit margins and uncertainties along the production and supply chain eventually result in higher costs for the consumer. This brings us to the next type of inflation.

Imported inflation is simply the increase in prices due to high import costs. Countries which import a lot of goods and services, either finished products or inputs into their own domestic production processes, are more susceptible to imported inflation. A classic case of imported inflation arises from oil as there are only a handful of oil producers in the world, yet every other country needs oil to fuel its industries and means of transport by sea, land, and air. The volatility of crude oil prices due to geo-political issues surrounding this commodity means it remains a key driver of most countries’ inflation rates – more so for landlocked countries like Botswana that incur extra transport costs. A weak domestic currency also intensifies the impact of inflation as imported goods and services become relatively more expensive.

Expectations inflation arises as economic participants forecast the future direction and intensity of price levels. For example, one of the factors driving current global inflation is the expectation that economic recovery and easing of business restrictions will continue to spur aggregate demand of goods and services, which in turn will continue to fuel rising prices. This is particularly crucial for those who lend funds and those on fixed incomes – they expect that the future value of their investments cater for the impacts of inflation.

But we must return to the 0.8 percent month-on-month jump in the inflation rate. The Bank of Botswana attributes this to the upward adjustment of domestic fuel prices in March and certain categories of goods and services. With a whole laundry basket of tariffs and levies that kicked off on April 1st yet to be factored in, inflation is set to increase even higher over the next couple of months. Cost-push factors like VAT and other levies will certainly drive the index, and global demand for commodities like crude oil and metals, coupled with the general positive in global economic growth prospects is likely to result in imported inflation into the Botswana economy.

However, it will be interesting to observe how the Bank of Botswana and the government, given the policy tools at their disposal, handle the demand-pull inflation side. A lot of this will depend on how long the accommodative monetary policy stance holds, as well as government’s implementation of its assortment of pandemic relief programmes and those already in the medium-term national agenda pipeline. The timing of application is even more important because importing too much cost-pull inflation before own economy boosters kick in might spiral prices out of control, potentially harming the economy even more.

*TSONE NTHUTANG is a banker based in Cote d’Ivoire with expertise and interests in economics, finance and financial risk management.