Consumer inflation steadies in July

20 Aug 2018

The headline inflation was steady in July at 3.1 percent, same rate as the previous month. The low inflation environment is seen as side effects of subdued domestic demand.

The national Consumer Price Index (CPI), which measures inflation, barely changed in July, only moving 0.1 percent from the June figure. The components of CPI, group indices, were generally moving at steady pace between the two months under review.

The highest increase was recorded in the Restaurants and Hotels group index, edging 0.4 percent on the back of increases in prices charged by restaurants, cafes, and also a slight uptick in accommodation prices. The Restaurants and Hotels group at a weighing of 2.76 is the smallest of the 11 groups that make up the CPI components hence its little effect in influencing inflation rate direction.

Other notable increases, most moving by 0.2 percent, were recorded in the following group indices; Alcohol and Tobacco, Clothing and Footwear, Transport, Recreation and Culture, and Miscellaneous Goods and Services. Other group indices remain flat: Housing, Water, Electricity, Gas and Other Fuels, Communication and Education did not record any movements in prices.

The increases were offset by a decrease in the influential Food and Non-Alcoholic Beverages index group which accounts for the second biggest component of the CPI. The decrease follows drop in prices of major section indices, notably vegetables, bread and cereals.

In the past seven months, headline inflation has been hovering around 3 percent, well with the objective range of 3-6 percent as set by the Central Bank of Botswana. Since 2016, inflation has been fluctuating around 3 percent, occasionally dropping below that but never above that. The highest it ever spiked by this year was in April, recording 3.4 percent. It was around that time when administered prices were adjusted: power and water tariffs were slightly increased. In addition price increases in public transport fares as well as petrol, diesel and paraffin.

Following that, inflationary pressures eased, with inflation rate drooping to 3.1 percent in June on the account of downward adjustments on off-net mobile tariffs that was implemented by the regulator.

Core inflation which is the trend component of overall inflation, that is, the part that is not affected by transitory price fluctuations, shows that inflation has been decreasing to levels not witnessed in the previous year. Core inflation excludes components of the CPI that are subject to frequent temporary price shocks such as administered or regulated prices, energy prices and food prices. In July it dropped to 2.3 percent, from the highs of 2.8 percent recorded in the beginning of the year.

In an era of low inflation environment, the Central Bank of Botswana has pursued an accommodative monetary policy, slashing interest rates since 2014, from 7.5 percent to the current 5 percent. The central bank which last cut the rate in 2017 has been maintaining the same rate this year and with inflation rate still low and within its objective range, it is widely anticipated that the bank will not adjust the interest rate upward.

At the current inflation rate of 3.1 percent, Botswana has the lowest rate in Southern Africa, and ranks in the top ten in Africa. The Bank of Botswana’s monetary policy committee has attributed the low inflation environment in Botswana to weakness in domestic demand. The economy while reporting positive growth, is saddled by the continuation of the tight labour market that has been evident in the past decade, with a high level of unemployment rate, and stagnated wages in addition to rising household debts. This has muted consumer purchasing powers, while businesses are in a tight spot which hinders capital expenditure or any price adjustments.