INFLATION HAS COME DOWN       Does it matter?

These days, people talk about inflation a lot. If they are not talking about inflation, they are talking about rate of inflation. And in recent years, the records show that inflation has been coming down. But, should all that be of interest to anybody? The answer is yes; it should be of interest to all of us.

What inflation is

Let us say you have some money today that can buy something you intend to buy. However, you decide to buy the thing next month. After a month, you go to the same market to buy that same something with that same money, but the market people tell you that, sorry, your money is no more enough to buy that thing. This means inflation has affected the price of what you want to buy.

I think it is something that has happened to most people before. In ordinary language, our people who go to the market would complain that the prices of things have been running. Sometimes too, people would say that the prices of things are going up. It all means the same thing; that is, inflation is affecting the price of things.

I have already said that, if you go to the market after one month, and they tell you that, sorry, your money is not enough, it means inflation has affected the price of what you want to buy. It may be that inflation has affected the price of the thing only by a few cedis, in which case we would say the rate of inflation is low. But it could also be that inflation would have affected the price of the commodity by a lot of cedis over the short time. In that case, the rate of inflation is high.

Ghana Statistical Service The Ghana Statistical Service is the authority charged by the constitution to collect and compile socio-economic data on behalf of the state. Every month, they go to various markets throughout the country to find out the prices of commodities we commonly use. They have staff throughout the country who do this.

When they take the prices of the commodities, they compare them with the prices of the same commodities in the past. From this comparison, they are able to tell us how slowly or quickly the prices of things are changing. In other words, from the comparisons, they give us the rate of inflation.

Most of the time, the rate of inflation people talk about is the change in prices over the last one year. When we take the price of something today, we want to know what the price was last year around the same time. They call it year-on-year inflation rate.

Money in people’s pocket

Good living is all about being able to buy the things you need. The more things the money you have can buy, the more satisfied you would be. Which is why we have to be interested in inflation because inflation has a way of stealing money from our pockets.

Let’s say you are a worker earning an income of one million cedis (˘1 000 000) a month at the beginning of a particular year. Let’s also suppose that this one million cedis could buy one television set at the time. Somebody can say that your income is one television set, and that person would be right.

Now, if the rate of inflation at that time is 40 percent and remains at that 40 percent up to the end of the year, it means the price of a television set would go up by 40 percent, making the new price one-point-four million cedis (˘1 400 000) by the end of the year.

It may be that your income at the end of the year is still one million cedis. In that case, I would say your income is now less than one television set because you now need far more than the one million cedis to buy a television set. The real difference between your income at the beginning of the year and at the end of the year is the four hundred thousand cedis (˘400 000). That is not small money. Where has all that money gone to? Inflation has stolen it, pure and simple.

It is clear that if the rate of inflation is high, then a lot of our money gets stolen from us with time. And if the rate of inflation is low, then only a small amount of our money gets stolen by inflation.

Government and inflation

Now, whether the rate of inflation would be high or low depends on how the government manages the economy. If you have a prudent government that manages the economy well and spends within its resource, rate of inflation would be low. If a government spends money uncontrollably and keeps printing money to make up the difference, rate of inflation is bound to be high.

The following table gives the year-on-year inflation in every December from 2000.

Year Rate of Inflation

December 2000	40.5 %
December 2001	21.3 %
December 2002	15.2 %
December 2003	23.6 %
December 2004	11.8 %
December 2005	14.8 %
December 2006	10.5 %

Source: Ghana Statistical Service

The record high prices of crude oil on the international market in the last four years affected commodity prices locally, especially in 2003. However, the trend is towards lower inflation. The 40.5% inflation at the close of December 2000 has been reduced to 10.5% at the close of December 2006. And that is good news.

In practice

But behind the figures, what do we see in practice? I think we remember that previously, the prices of commodities rose more quickly. If government was going to read the budget, we hurriedly spent whatever money we had on things we imagined we would need in the near future. The fear was that inflation would steal most of the money once the budget was read.

These days, you ask of the price of something, and after several months, you go and ask again and the price is still the same whether a budget has been read or not. We all like that, and it is the reason we are pleased inflation is going down.

Kwaku Kwarteng
Government Spokesperson
(Finance & Economy)

Rate	Dec 2000	Apr 2007
Bank of Ghana Prime Rate	27.0%	12.5%
Bank Lending Rate (Average)	47.0%	24.0%
91-Day Treasury Bill Rate	42.0%	9.6%

Source: Bank of Ghana