Opinion / Columnist
Fallacy of deflation in Zimbabwe
20 Feb 2014 at 15:24hrs | Views
Disoriented by the economic ruin that afflicted them prior to the de jure adoption of the multicurrency system, and, still fresh from the perils of hyperinflation (inflation gone mad), Zimbabweans are raising a false alarm about what has been alleged to be deflation in the economy. No less an individual than the minister of finance (see budget speech) has alluded to the risk of deflation having a negative feedback loop to the economy.
It would seem that, as usual, there is befuddlement with the terms disinflation and deflation.
Disinflation refers to the process wherein the rate of inflation is slower than its previous level. In other words, if the inflation rate drops to a lower level (.e.g. 2 per cent) than the previous rate of inflation (of say, 3 per cent), technically that difference is disinflation. Which is precisely what Zimbabwe is experiencing right now. The key conditionality to note here is that in disinflation, prices are increasing (2 per cent), albeit at a slower rate relative to the previous month (of 3 per cent). To illustrate the above with a silly example: last month you bought eggs for US$10 and you sold them for US$10 plus 3 per cent profit. This month you bought the same pack of eggs for US$10 but you sold them for US$10 plus 2 per cent. From the foregoing, it is clear that in both cases prices have increased from US10 but by different rates of increases, i.e. 2 per cent and 3 per cent respectively.
In contradistinction, deflation, is the opposite of inflation, .i.e. prices of goods and services within the borders of a country are NOT increasing BUT decreasing. Or to put it in street lingo: deflation manifests itself through "negative inflation". You buy the same eggs at US$10 and you sell them at US$8. That is deflation. Deflation, of course has adverse repercussions for the economy. It leads to unemployment, bankruptcies, economic downturn, negative GDP, inter alia.
Consequently, Zimbabwe is experiencing disinflation rather than deflation. To cap it all, the disinflation that the country is experiencing is caused mainly by the increasingly weakening South African Rand which is the currency used by consumers in Zimbabwe to order goods from RSA. Simply put, they sell their goods in Zimbabwe earning US$s, which they then convert to Rands, getting more Rands in the process, hence re-ordering their stocks using fewer rands than before. In a nutshell, their stocks are becoming cheaper in Rand terms which they then pass on to their customers in the form of lower prices (profits) because their position has been compensated by the favourable exchange rate (which profits them as they convert US$S to Rands).
I have tried to explain this in very simple terms so that even those obdurate analysts who like to mislead policy makers can grasp this issue. On the back of the foregoing, it is clear therefore that what has been misperceived as deflation, has in fact been disinflation. And these two are distinctly different and invariably have different results in a given economy. Zimbabwe is experiencing DISINFLATION rather than DEFLATION.
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Colls Ndlovu is an independent financial analyst and he writes in his personal capacity.
It would seem that, as usual, there is befuddlement with the terms disinflation and deflation.
Disinflation refers to the process wherein the rate of inflation is slower than its previous level. In other words, if the inflation rate drops to a lower level (.e.g. 2 per cent) than the previous rate of inflation (of say, 3 per cent), technically that difference is disinflation. Which is precisely what Zimbabwe is experiencing right now. The key conditionality to note here is that in disinflation, prices are increasing (2 per cent), albeit at a slower rate relative to the previous month (of 3 per cent). To illustrate the above with a silly example: last month you bought eggs for US$10 and you sold them for US$10 plus 3 per cent profit. This month you bought the same pack of eggs for US$10 but you sold them for US$10 plus 2 per cent. From the foregoing, it is clear that in both cases prices have increased from US10 but by different rates of increases, i.e. 2 per cent and 3 per cent respectively.
In contradistinction, deflation, is the opposite of inflation, .i.e. prices of goods and services within the borders of a country are NOT increasing BUT decreasing. Or to put it in street lingo: deflation manifests itself through "negative inflation". You buy the same eggs at US$10 and you sell them at US$8. That is deflation. Deflation, of course has adverse repercussions for the economy. It leads to unemployment, bankruptcies, economic downturn, negative GDP, inter alia.
Consequently, Zimbabwe is experiencing disinflation rather than deflation. To cap it all, the disinflation that the country is experiencing is caused mainly by the increasingly weakening South African Rand which is the currency used by consumers in Zimbabwe to order goods from RSA. Simply put, they sell their goods in Zimbabwe earning US$s, which they then convert to Rands, getting more Rands in the process, hence re-ordering their stocks using fewer rands than before. In a nutshell, their stocks are becoming cheaper in Rand terms which they then pass on to their customers in the form of lower prices (profits) because their position has been compensated by the favourable exchange rate (which profits them as they convert US$S to Rands).
I have tried to explain this in very simple terms so that even those obdurate analysts who like to mislead policy makers can grasp this issue. On the back of the foregoing, it is clear therefore that what has been misperceived as deflation, has in fact been disinflation. And these two are distinctly different and invariably have different results in a given economy. Zimbabwe is experiencing DISINFLATION rather than DEFLATION.
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Colls Ndlovu is an independent financial analyst and he writes in his personal capacity.
Source - Colls Ndlovu
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