Inflation Target Missed

ZAMBIA's inflation closed 2014 at 7.9 percent. The annual rate of inflation shows how much higher or lower prices are compared with the same month a year earlier. It indicates changes to our cost of living. An inflation rate of 7.9 percent in December 2014 means prices are 7.9 percent higher than they were 12 months earlier in December 2013. Or, to look at it another way, you need to spend K107.9 now to buy things you bought 12 months ago for K100.

The inflation rate is calculated every month by looking at the changes in prices of over 400 goods and services across Zambia. This is known as the basket of goods and is regularly updated to reflect changes in the things we buy.

The end-2014 inflation rate has missed the 6.5 percent target set by the Hon. Minister of Finance during his 2014 Budget Speech. The end-December 2014 inflation is lower than the 8.1 percent November 2014 inflation, thanks in part to the Bank of Zambia's raising of the policy rate to 12.5 percent from 19th November 2014. The next policy rate review is expected on 8th February 2015. Inflation is broadly broken down into food and non-food components. The food and non-alcoholic beverages component accounts for 53.5 percent share of the total weight and contributed 4.0 percentage-points of the 7.9 percent in December, while the non-food component accounted for 3.9 percentage-points. Compared to November, food inflation share increased by 0.2 percentage-points, while furnishings and household equipment, transport, recreation and culture and education collectively declined by 0.4 percentage-points. The other components remained unchanged. The net effect was a decline by 0.2 percentage-points from 8.1 percent to 7.9 percent.

The decline in the inflation rate from 8.1 percent in November to 7.9 percent in December does not mean that the prices have declined. Rather, it means that prices are higher in December but have not increased by as much as they did in November.

The end-2014 target was missed due to several factors. Top on the list was the increase in food prices. Of the 7.8 average inflation rate in 2014, about half of that inflation has been due to food prices. The percentage-point

contribution of the food component to the overall inflation rate increased from about two-fifths (42 percent) in January to half (50 percent) in December. Despite recordhigh maize surpluses during the 2013/2014 agricultural season, mealie meal prices remained higher than expected until around September.

The depreciation and high volatility of the Kwacha against foreign major currencies during the first half of the year led to higher import prices. By the middle of the year, the Kwacha had lost about one-fifth of its value against the dollar and the pound.

ZESCO's effecting of new electricity tariffs at the beginning of July evidently increased the contribution of the CPI component for energy from 1.0 percentage-point during the first half to 1.5 percentage-points in the second half of the year.