What explains Low Inflation and high cost of living?

by Christopher Kiiza
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Inflation is the general increase in the prices of goods and services in the country. It is typically measured by an annual percentage change in the price index such as the Consumer Price Index or the Producer Price Index.

Inflation erodes the purchasing power of a currency, meaning that overtime, the same amount of money buys fewer goods and services.

Uganda’s inflation slowed down from a peak of 10.7% in October, 2022 to 2.6% in November, 2023. 

According to Bank of Uganda, this is expected to remain within the policy target of 5% over the medium term, supported by increased agricultural production, the increase in the supply of locally manufactured goods, increased exports which increase the supply of foreign currency in the economy, increased efficiency in economic activities due to increasing integration of new technologies including ICT capabilities in our manufacturing and other businesses and good economic policies.

Despite the significant drop in inflation which aligns with the Central Bank’s below 5% target, there exists a perceptible discrepancy between the Central Bank’s figures (decrease in inflation) and the sentiments among members of the general public.

The public still harbors the sentiments that the prices of goods and services are still high.

The Bank of Uganda Deputy Governor, Michael Atingi-Ego gives an explanation to this. He says that the decrease in inflation does not necessarily mean that the prices of goods and services are coming down, but rather, the rate at which the prices of goods and services are rising, which for Uganda’s case are decreasing.

 “When we say that inflation has come down from a high of 10.7% in October 2022 to now a low of 2.6% in November 2023 (headline inflation), it does not mean to say that prices are coming down. It is a rate at which prices are increasing, which is coming down (for Uganda’s case). So, it means that the same price has been increasing at a faster rate, and that same price is now increasing, but at a slower rate. So, there is that trajectory because inflation is about the rate at which prices are changing. And as long as the rate at which those prices are changing is positive, the price level will continue rising. So, we are not talking about prices coming down,” said Atingi-Ego while appearing on NTV.

In measuring inflation, numerous items are considered, with some having rising prices while others registering reduction in prices.

 “But on average when you combine all of them, you will see that on average, inflation is still going up but at a reduces pace,” Atingi-Ego explains.

Why Are Consumers Not Feeling The Slow Rise In Inflation?

“If you take the financial year 2021/22, the economy grew by 4.6%. inflation on average that year was 2.3%. Come financial year 2022/23, the economy grew by 5.2%, but the average inflation in that financial year was 8.8%. So, you find that 2022/23, inflation grew faster than the growth of the economy.”

“So, If I can take people’s income to be proxied by the rate of the growth of the economy, it means that people’s incomes on average grew much slower than the rate of inflation. So, certainly, there is irrational of value of money. So, people do not see that inflation coming down. They are not feeling it in their pockets. The real purchasing power has been eroded. So, when inflation comes down and we maintain those levels of growth of at 6%, you will feel that your capacity of the bucket of goods and services you can buy from the same money might increase,” Atingi-Ego explains.

Impact On The Economy

The decrease in inflation is a positive sign for Uganda’s economy. It indicates that prices are rising at a slower rate, which can help to boost economic growth. When inflation is high, it can erode the purchasing power of consumers and businesses, making it difficult for them to save and invest. This can lead to slower economic growth.

Additionally, the decrease in inflation can help to reduce the cost of living. This is because when prices are rising slowly, people have more time to adjust to the higher prices. This can help to prevent people from falling into poverty.

The decrease in inflation can also make Uganda’s exports more competitive. When inflation is high, the prices of Uganda’s exports become more expensive, making them less competitive in the global market. This can lead to a decline in exports and economic growth.

The reduction in inflation, therefore, signifies a favorable rebound of the economy, subsequent to the difficulties posed by disruptions in the supply chain due to the COVID-19 pandemic, along with the worldwide economic impacts stemming from the Russia-Ukraine conflict.

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