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Downward spiral for annual inflation expected

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ANNUAL inflation is expected to continue on a downward trend throughout the year, but the management of month-on-month inflation between now and year-end will be a key determinant of the overall inflation rate for December 2021, the Confederation of Zimbabwe Industries (CZI) says.

RONALD MUCHENJE

The month-on-month inflation rate for August 2021 stood at 4.18%, gaining 1.62 percentage points on the July 2021 rate of 2.56%, while the blended month-on-month inflation rate for August was 1.32% up 0.65% from the July rate of 0.67%.

The blended year-on-year inflation rate for August was 21.50% while the annual inflation rate declined from 56.37% in July 2021 to 50.2% in August 2021.

In its August 2021 inflation and currency developments update published last week, the CZI said managing shocks, such as the parallel market exchange rate movement as well as increase in money supply due to financing of the forthcoming agricultural season, was critical in taming inflation.

Single-digit inflation, the CZI said, is now certainly going to be attained in the post-2021 period, as inflation is likely to close the year at more than 30%.

While the year-on-year inflation is still decelerating, the CZI said the month-on-month inflation was a concern, with the exchange rate premiums appearing to be the main drivers of the inflationary trends.

“The parallel market falls into the price determination equation of firms because their cost of production are pegged to the parallel market. Products whose services are indexed to foreign currency generally correspond to those that triggered a rise in the month-on-month inflation for August 2021. Thus, although the month-on-month inflation was only at 4.2%, prices of items that generally move in tandem with the parallel market had month-on-month inflation of more than double the national average. The widening of the parallel market premium is generally a result of the rigidity of the auction rate, which has barely moved over a one-year period,” the CZI noted.

The auction rate only increased by 7% between August 2020 and August 2021 to ZW$86 per U$S1, while the parallel market increased by more than 53% over the same period.

The CZI stressed that the sluggish movement of the auction rate is mainly due to the fact that the official platform is no longer respecting the principles of a true Dutch auction market, where the highest bidder wins while the lowest bidder has a high chance of losing, hence creating a moral hazard among businesses.

“However, exporters do not have the incentives to continue exporting due to currency distortions,” the CZI said.

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