In recent weeks, there has been a heightened debate surrounding the drop in the inflation rate from double digit to single digit, amidst rising fuel pump prices, food prices and high cost of living. Zambia Statistics Agency announced that annual inflation rate for the month of June 2022, had dropped to 9.7% from 10.2% which was recorded in May 2022. On the other hand, Energy Regulation Board (ERB) announced an upward adjustment in pump prices of petroleum products by K1.80/litre for Petrol, K2.37/litre for Diesel and K2.51/litre for Kerosene for the month of July 2022. In the manufacturing industry, a drop in inflation is expected to assist manufacturers in planning for production and encourage more investment while a rise in petroleum products is expected to raise production cost. Do consumers therefore stand to benefit from these developments in the manufacturing industry?
To start with, it is imperative to first understand what inflation rate is and how it comes about. Inflation rate can be defined as a speed at which general price levels rises in the economy. That is, the faster the speed at which prices are rising in the economy, the higher the inflation rate and vice versa. Inflation usually emanates from either a rise in the cost of raw materials necessary for production of goods (Cost-push inflation) or an increase in demand for goods on the market (Demand-pull inflation).
For the past few years, the manufacturing industry has been grappling with a surge in production costs mostly emanating from instabilities in the Kwacha/Dollar exchange rate, disruptions in global supply chains brought about by the emergence of Covid-19 (characterized by local downs of borders and a slowdown of trade between countries), as well as changes in weather patterns among other things. These factors pushed up prices of raw materials on both the domestic and international markets resulting into a rise in the cost of production for manufacturers locally. The cost push was reflected in the prices of commodities on the domestic market that equally rose. Likewise, inflation rate rose from 9.3% in August 2019 to a peak of 24.6% in July 2021 representing a percentage increase of about 164.5%.
However, since August 2021, inflation rate dropped from 24.6% to a recent low of 9.7% in June 2022. Additionally, there was an improvement in the performance of the Kwacha against the US dollar from around K17.17/US$ on 29th June 2022 to about K16.52/US$ on 21st July 2022. Despite the improvement in the inflation rate for the period between August 2021 and June 2022, and the performance of the Kwacha against the US dollar, domestic food prices as well as cost of living still remains high. This is due to poor performance of other factors among them unpredictability in fuel pump prices which have increased the cost of production.
Fuel still remains one of the key inputs in the production and distribution of goods in the manufacturing industry that if left unattended to will increase the cost of production and therefore the cost of living. While benefits from a single digit inflation rate and an appreciation in the exchange rate take time to be felt by consumers, an increase in fuel prices is felt almost immediate in form of high food prices thereby reversing the gains made from lower inflation and strengthened exchange rate.
For example, manufacturers benefit from an appreciating Kwacha makes it relatively cheaper to purchase raw materials. But as long as fuel costs remains high, gains made from a stronger exchange rate will have to be redirected from the cheaper raw materials to compensate high distribution cost for products resulting from higher fuel prices.
In order for consumers to benefit from the single digit inflation and an appreciation in the Kwacha, there is need for Government to curtail inflation from the manufacturing industry by implementing strategies that will further reduce inflation to between 6 and 8 percent, as well as support the improved performance of the Kwacha. Additionally, the Government should work on stabilizing the fuel prices to reduce on the unplanned production costs for manufacturers, as way of insulating the manufacturing industry from negative effects resulting from increases in fuel prices. Stabilising the fuel price will enable the industry to operate in a stable macro and micro economic environment and participate positively to increase its contribution to the growth and development of the economy.
