The Ghana Statistical Service (GSS) surprised all of us by announcing an inflation rate of 7.8% in August 2019 compared to 9.4% in July. What would seem like a sharp drop in the inflation rate however was explained as a result of rebasing of the Consumer Price Index (CPI). I explain what that means and any possible implications below.

Inflation is simply the rate at which the prices of goods and services are rising in an economy over a defined period of time. This is one of the most important metrics for any economy because of what it means for living standards and the real value or purchasing power of money. Essentially, the inflation rate shows how quickly what a given amount of money can buy is reducing. For example, if the inflation rate is 9.4%, it means you can buy 9.4% less goods and services with say GH¢100.00, than you could a year ago with the same amount.

The inflation rate plays a pivotal role in the decision-making of the various elements in an economy. Employees negotiate how much they would want to be paid by looking at the inflation rate. Businesses plan on how they will price items, pay workers and purchase supplies by looking at the inflation rate. Investors demand a minimum amount of return on their investment by looking at the inflation rate.

It is partly because of the importance of controlling the inflation rate that the Bank of Ghana (BoG) exists. The BoG attempts to control inflation by controlling the policy rate (currently 16%) and by managing inflation expectations. The policy rate is the rate at which the BoG lends to banks on a very short basis. If it raises the policy rate, banks borrow at a higher rate and therefore do not make loans to customers as much as they would like to. This reduces the circulation of money in the economy and forces prices of goods and services down as fewer people can buy them. In managing inflation expectations, the BoG announces an inflation target (which is currently 6%-10%) and thus encourages people to use that target to guide their planning. The idea is that as everyone plans for a 6%-10% inflation rate, inflation will eventually reach that target since prices of goods and services would have been planned to increase by that amount.

If you did not quite understand my attempt to explain the central bank’s inflation targeting framework, have no worries. The important thing is to know that the BoG tries to keep inflation within an explicit range.

So how exactly is inflation measured? Certainly, it is not likely that the GSS can measure the price of every single item in the country every month in order to determine by how much the price has risen (or fallen). The GSS has a basket of goods and services that it tracks in order to determine changes in their prices and for that to serve as a pretty good indication for the general price level for the entire country. The GSS also picks a particular year to serve as a base year or a reference year. The base year before the latest GSS inflation report was 2012. That would mean that a basket of goods and services selected in 2012 would be measured over time and changes in the prices of these items would give us the inflation rate. The problem with this is that as time goes on, people stop consuming certain products and start consuming others. Therefore if the base year is too old, the inflation rate may not exactly be reflecting the rate of change of prices in the goods and services that most people in the country consume.

That is why the GSS has changed the base year to 2018 and has expanded the items in the basket of goods and services measured from 267 to 307. It has also expanded its survey from 42 markets across the country to 44 markets. The results of this base rate change is the inflation rate of 7.8% that was announced for August 2019. However, this new rate cannot be compared with the 9.4% recorded in July because they do not have the same bases. The GSS will now release a new set of inflation figures for the previous months of 2019 using the new base year. This is what would allow us to know the trend of inflation for this year.

In the meantime, the inflation rate of 7.8% stands as pretty significant for an economy which has historically struggled with high inflation. It is my hope that the goal of low, stable inflation does not continue to elude as.

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