Sunday, October 25, 2020

Consumer Inflation slows in May

As food prices steadily rise, the reduction in fuel costs has helped slow down the spike in cost of living which was anticipated to pick up pace on the back of disruption in economic activities caused by Covid19 measures, suggests data from Statistics Botswana’s latest inflation report.

The consumer price index (CPI) which tracks change in price for certain goods and services shows that prices increased by 2.4 percent in May, retreating from a higher pace of 2.5 percent. The price increases were mostly found in the food and non-alcoholic beverages, the third largest component of CPI, with prices growing by 0.6 percent between April and May. Since beginning of the year, data shows that the food index is up by 1.4 percent.

The steady rise in food prices was mitigated by Botswana Energy Regulation Authority (BERA) which slightly reduced retail pump prices for petrol, diesel and paraffin. This led to the transport index, the largest component of CPI, decreasing by 0.9 percent. The reduction in prices in the transport group was also noted in purchase of vehicles.

The slight retreat in consumer prices comes after high expectations that the country was entering an inflationary period, where prices were forecasted to rise. In April, the inflation rate grew by a larger pace to 2.5 percent, up from the 2.2 percent rate that stretched since December.

The sudden upward movement in prices was largely due to the 22 percent increase in the electricity tariff that was effected beginning of April.

On Thursday, the central bank’s Monetary Policy Committee (MPC) decided to maintain the bank rate at 4.25 percent, motivated by the inflation rate which remains below the lower bound of the Bank’s objective range of 3 – 6 percent. Central banks usually tweak the bank rate looking at economic conditions, decreasing the rate to stimulate demand and increasing the rate when prices start picking up.

Moses Pelaelo, the Bank of Botswana (BoB) governor who also leads the MPC, said COVID-19 pandemic and consequent containment measures have severely curtailed economic activity globally and domestically as production, supply chains, project implementation and provision of goods and services are constrained.

“Similarly, consumption and spending are disrupted, hence domestic demand pressures and foreign prices remain subdued. Consequently, overall risks to the inflation outlook are skewed to the downside,” Pelaelo said in a statement released after every MPC meeting, which happens every two months.

The governor said inflation may rise above current forecasts if international commodity prices increase beyond current projections and in the event of upward price pressures occasioned by supply constraints due to travel restrictions and lockdowns. 

According to the central bank, inflation is forecast to revert within the 3 – 6 percent objective range in the third quarter of 2021, a significant downward revision from the April 2020 forecast in which BoB forecasted inflation to remain below the lower bound of the objective range for the remainder of the year.

The inflation rate for June is expected to retreat as well after BERA further made massive reductions to retail pump prices for petrol, diesel and paraffin during the month.

RELATED STORIES

Read this week's paper

StanChart, VISA accelerates Botswana’s digital drive

Botswana is on a fast track to fully adopting digital banking and contact less payments, thanks largely to the partnership between the...