EXPLAINING INFLATION: WHAT ZAMBIANS NEED TO KNOW!!

I have seen a lot of talk on social media and have had discussions and even arguments with some of my colleagues about the state of our economy and the implications of inflation. Statements like, "which reduced Inflation, the cost of living is still high." "Prices are still increasing so reduced Inflation is just on paper."

After these statements, what I have come to conclude is that our unhappiness may sometimes stem from a lack of understanding. Clearly a lot of people on social media do not understand what inflation is and how it relates to prices so I have decided to give in as simple language as I can an explanation of inflation.

To kick start this discussion I will first give a definition of inflation then give practical examples to create context!!

Inflation is the rate of increase in prices over a given period of time (IMF). What this statement goes to show in simple terms is that if inflation is at 30% then on average prices are INCREASING by 30% say maybe month on month. If inflation increases to 40% then prices are still increasing but now at a quicker pace of 40% say month on month. It would mean that prices are getting worse. An increase in inflation means prices are increasing and at a faster rate. However, a decrease in inflation does not mean necessarily that prices are reducing and I will explain why. (and this is where most people miss it).

Going back to our example, if inflation reduces from 30% to say 15%, it doesn't mean that prices have necessarily reduced. What it means is that prices are still increasing but rather at a slower pace of 15% say month on month as compared to the faster rate of 30%. If the price of a product was say K10 000 at inflation rate of 30%, the expectation is that the price will increase to K13 000. But since inflation has reduced to 15%, the expectation is that the price will increase from K10 000 to K11 500 and not K13000 which should have been the case at inflation rate of 30%. From this example you can see that you are clearly better off despite there being no decrease in prices. You may not see reduced prices but in absolute you are better off. If inflation further moves from 15% to say 5%. It doesn't necessarily mean that prices are reducing. What it means is that say month on month prices are still increasing but now at a much slower rate of 5% in comparison to the faster rate of 15%. So in absolute, you are better off though you may not yet see it. So statements like, "but prices are still increasing" though correct are not absolutely correct!!

Now let's assume that inflation reduces from 5% to 0%. In this case prices which were increasing at a rate of 5% are now increasing at a rate of 0%. In short prices are not increasing but are staying the same on average month on month.

When inflation reduces from 0% to -1.5%, the term changes from Inflation to Deflation. Here now is where citizens start to see reductions in prices. What this means is that as long as inflation keeps reducing, we are better off than before. The goal is to get inflation as close to zero as possible and even to the negatives (deflation). So as long as inflation is still a positive figure, you should expect on average an increase in prices (what will differ is the rate of increase).

At 12 August 2021, inflation was around 23%, it is currently around 11.5% (April 2022). What this means is instead of prices increasing at a faster rate of 23%, prices are still increasing though now at a slower rate of 11.5% which is an improvement and Zambians are arguably better off though the benefit may not yet be clearly visible. True indeed the cost of living is still high but going by my explanation, we are getting better. If inflation keeps reducing then we can say price wise that we are going the right way!!!