[ 2012-06-17 ]

High cost of living due to long period of high inflation-Kwakye
Accra, June 17, GNA – The Institute of Economic
Affairs (IEA) at the weekend attributed the
current high cost of living in the country in
spite of the attainment of single-digit inflation
rates to the long period of high inflation rates.

“This is a situation that is not going to be
ameliorated anytime soon, since there is a lot of
catching up to do,” Dr. J. K. Kwakye, IEA Senior
Economist, stated in a research document on:
“Single-digit inflation and the cost of living
dichotomy in Ghana,” made available to the Ghana
News Agency in Accra.

He said for millions of Ghanaians to benefit from
single-digit inflation, Government must sustain
the low rate of inflation for a considerable
length of time and to have labour productivity
increase sufficiently to allow significant
increases in wages and salaries without stoking
inflation.

“On the one hand, this requires prudent
macroeconomic policies to keep demand under
control. On the other hand, it calls for policies
that increase the economy's growth potential to
ensure adequate supply of goods and services at
all times.

According to Dr Kwakye, the fact is that because
Ghana has had high inflation rates for a long
period of time, this has cumulatively led to a
high cost of living in the country.

He said the increase in the cost of living has not
been matched by corresponding increase in wages
and salaries or incomes as a result, most people
have become worse off in real terms.

In fact, starting from the base year of 2002 for
computing the current Consumer Price Index (CPI)
series, the average price index rose from 100 to
396 as of end-April 2012.

“This shows an increase of 296 per cent over a
decade, which works out to an annual average
increase of nearly 30 per cent. Over this period,
the annual average salary increase has been much
less, thereby making workers worse off in real
terms.

“Since inflation was even much higher in the past,
it means that over a longer period of time, the
cumulative increase in the cost of living has been
much higher than the corresponding increase in
wages and salaries.

“The gap between incomes and the cost of living
can be best illustrated with the real value (or
purchasing power) of the minimum wage or with the
income-poverty rate.

“The daily minimum wage is currently GH˘4.48,
which works out to GH˘134 for a 30-day month. For
anybody at the bottom of the pay ladder receiving
this monthly income, we know from the prices of
goods and services that it is not enough to pay
for his basic needs like food, rent,
transportation, utilities, and communications.

“He might also be paying for other goods and
services like clothing, healthcare, and education.
Millions of people in this country live below this
income threshold either because they receive low
incomes in their jobs or they may not even be
employed and may be living on the charity of
relatives and friends.

“Taking it from the income-poverty angle, one
arrives at a similar result. It is known that
millions of Ghanaians live below US 2.00 dallar a
day, which is less than GH˘4.00, slightly below
the daily minimum wage,” he stated.

Dr Kwakye said Ghana has a long history of high
rates of inflation, for decades, the country
recorded double-digit inflation rates and in some
cases even triple-digit rates.

He said empirical literature attributed Ghana's
high rates of inflation largely to the classical
explanation of supply of goods and services not
keeping pace with demand.

The slow growth of supply was the result of
production bottlenecks, while demand was fuelled
by expansionary fiscal and monetary policies,
explaining that apart from supply and demand
factors, cost-related factors, particularly
exchange rate depreciation and increases in
petroleum and utilities prices from time to time,
put additional pressure on prices.

He said during the past decade, however, inflation
has been significantly reduced from 40.5 per cent
in 2000 inflation has been steadily reduced to 9.1
per cent as of April 2012.

The Senior IEA Economist said the success in
bringing inflation down is due to a combination of
factors as Ghana has benefited from low imported
inflation as global inflation has generally
abated.

He said fiscally-driven demand pressures have
declined in Ghana as budget deficits and
associated financing have generally declined, the
production and supply of food in particular, which
is a major component of the CPI basket, have
improved.

“Meanwhile, the exchange rate has been stable for
longer periods than previously, reducing its
impact on inflation. And finally, fuel and utility
prices have been subjected to some degree of
control, preventing their full pass-through to
general prices,” he said.

Inflation was reduced to single digit in June
2010, which has since been sustained. This has
been helped more by much lower rates of food
inflation than non-food inflation.

The former has been in low single digits since
January 2010 while the latter has been in the low
double-digits all the time. With the achievement
of single-digit headline inflation, a debate has
emerged in the country as to what extent it
reflects the situation on the ground, in terms of
the general cost of living. Some people have even
questioned the reliability of the official
inflation figures.

According to Dr Kwakye, the research seeks to
throws some light on the measurement of inflation
and explains why there could be a dichotomy
between the statistical measure of inflation and
the cost of living.

Dr Mahamudu Bawumia, New Patriotic Party (NPP)
Election 2012, Running mate, recently at the fifth
Ferdinand O. Ayim Memorial Lecture in Accra
sparked off the single-digit inflation debate.

Speaking on the topic, “The State of our Economy,”
Dr Bawumia among other issues explained that:
“Single digit inflation has not reflected in a
reduction in the cost of living and in this regard
has been rendered practically meaningless.

Ghanaians are, in fact, experiencing triple digit
“inflation” in their pain and suffering,” he
stressed.

Source - GNA

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