Another 2010 prediction

With elections due in October, Kikwete’s administration should be happy with an almost guaranteed steep decline in the inflation rate this year. The government has consistently missed its inflation targets in 2009 and the urban vote could take a hit when the price of maize flour is going through the roof. The June 09 target was seven percent. The most recent figure is for November 09 – 12.5 percent (I’d link to the details, but the National Bureau of Statistics site’s page for inflation figures won’t let me download the details).

Joe Masawe of the Bank of Tanzania is telling us to expect a rate closer to seven percent this year for sure. Why? He’d have you think it’s due to “the easing of global commodity prices, coupled with the sustained prudent fiscal and monetary policies”, actions of the Bank of Tanzania itself, and of course……. Kilimo Kwanza, our national policy/framework/vision for agriculture. It’s all here in The Citizen.

Only in the last para does the Citizen quote the ubiquitous Ms Razia Khan of Standard Chartered Research who tells us one reason it’s really going to fall:

Ms Razia Khan of Standard Chartered Research said the drought-related surge in headline inflation in 2009 revealed how problematic the high weighting of food in the consumer price index basket was.

“The introduction of a new basket in 2010, with a reduced weighting for food should see inflation decline meaningfully,” Ms Khan said in a response to an email by The Citizen.

That’s right. Inflation will fall due to changes in the way it’s measured. Firstly, inflation is the rate of increase in the Consumer Price Index, determined by tracking what is thought to be a representative basket of goods. Only now, with inflation in double digits for the past year due to high food prices, the share of that basket taken by food is thought to be too big.

Secondly (and I don’t pretend to understand this), on the advice of the World Bank and the IMF, the formula for calculating changes in the Consumer Price Index is to be changed from an arithmetic to a geometric one. Read more on Bloomberg right here.

So what? Well, when introduced in Kenya, this change contributed to a fall in the  rate of inflation from nearly 18 percent in September this year to 6.6 percent the following month.

Back in November Omondi in Kenya’s Business Daily was probably on the money – it’s the investment climate, stupid:

Policy makers reckon the new figures should enhance the country’s investment credentials arguing that the previous sky high inflation — which were the highest in the region — had become the biggest obstacle to selling Kenya as a favourable investment destination.

It made investors view the country as a high-cost production location, they said, giving neighbouring Uganda and Tanzania with an average annual inflation rate of about seven per cent competitive advantage.

Favourable inflation data is also expected to ease the pressure on fund managers running pension funds and other collective investment vehicles such as unit trusts that over the last two years have been posting returns that are way below the inflation levels.

And we can probably apply the same to Tanzania.

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