EVEN as consumer price inflation hovers at its highest level since early 2010 � 15.9% in August � there are strong indications that it will rise futher over the coming months. Producer price inflation [PPI] reached its highest level ever in August, at 48.3%, according to data released last week by the Ghana Statistical Service [GSS].
Already, the inability to meet the end of year inflation target of a maximum of 15% has been widely accepted. �In assessing the inflation outlook, the Monetary Policy Committee observed that inflation is expected to peak in the near term� Bank of Ghana Governor, Dr Kofi Wampah announced a fortnight ago. �The latest forecast showed that inflation is likely to stay slightly above the upper band of the revised target of 13% plus or minus 2% by end of 2014. However, inflation is expected is expected to move within the band in the second half of 2015 barring any adverse shocks.�
The International Monetary Fund�s [IMF] recent mission to Ghana which came to open negotiations on an economic stabilization programme for the country also projects inflation to reach an average of around 15% for the year.
However, the much higher PPI is creating worries that sharply higher domestic production inflation will fuel similarly steeper consumer price inflation. The wide difference between the two indicates that domestic producer themselves have been absorbing much of the production input inflation they have been facing rather than try to pass it all on to their customers in the current dispensation of falling real purchasing power. However, with their profit margins now being squeezed viciously, they will be hard pressed to absorb more producer price increases.
Indeed these fears have been publicly aired recently by chieftains of the Ghana National Chamber for Commerce and Industry who fret that their members are being caught between losing their profitability and losing their customers patronage.
Government officials argue that PPI only captures the rises in the production costs of domestic producers, and not the product delivery costs of importers of finished goods, so the relatively high input inflation facing domestic producers would not necessarily translate into similar consumer price inflation.
Indeed they argue that the on-going appreciation of the cedi against the US dollar will ease non-food inflation for both imported finished goods imported raw materials and intermediate goods.
However, the nature of the increases in the PPI indicate that domestic production costs are in for further sharp increases imminently, as an IMF programme is agreed upon and implemented.
One of the policies the IMF is insisting on is the removal of the remaining subsidies. In fact the Fund recommends that electricity tariffs are hiked above full cost recovery levels to make up for under- recoveries in the past with a view to putting the Electricity Company of Ghana on a sound financial footing.
This will have a severe reverberating effect on domestic production costs if the PPI�s recent trajectory is anything to go by. The utility sub-sector, which has seen two major tariff hikes over the past year, has recorded the highest year-on-year producer price hikes currently, with an inflation rate of 75.8%. The petroleum sub-sector has similarly been one of the biggest contributors to producer price inflation and the IMF will insist on further product price hikes there as well.
Importantly, the cedi�s depreciation over the past eight months has cut imprts for the period by nearly 15% compared with the corresponding period of 2013 and this has given locally made products a relatively larger market share, which in turn has increased the impact of the PPI on overall consumer price levels. With producer price inflation showing little prospects of falling, its upward effect on consumer price inflation is inevitable. The only questions still to be answered are by how much and when the impact will be felt the most.
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