Inflation dropping but remains a threat

Pushing a decline. Movement in fuel prices, especially petrol, has been key in pushing a decline in inflation in the last two months. Photo / Edgar R Batte 

What you need to know:

  • Inflation has been, and continues to be the biggest challenge to the economy as we head into the new year. However, the rate of upward movement has been muted with slight reductions witnessed in the last two months to December.   

The sharp increase in commodity prices exacerbated by external and internal factors has seen headline inflation, which measures movement of prices of goods and services, including commodities such as food and energy prices, close 2022 at an average of 7.1 percent.

The 7.1 percent average is the highest in more than a decade, hitting poor households the hardest.

Uganda Bureau of Statistics (Ubos) indicated last week that compared to previous years, 2022 inflation was way above target.

For instance, in 2021 inflation was way below the 5 percent Bank of Uganda target at 2.2 percent while in 2020 it stood at 2.8 percent.

During 2022, average core inflation, which measures change in the price of goods and services, but does not include those from the food and energy sectors, stood at 6 percent, which was also way above the annual average.

For instance, during 2021, core inflation averaged at 2.8 percent, which was a decline from the 3.2 percent recorded during 2020.

Inflation was one of the biggest challenges in 2022 as the global economy and particularly Uganda, remained volatile due to geopolitical and ecological challenges.

The challenges impacted global and national economies, thus a slowdown in growth and a sharp increase in inflationary pressures.

Inflation that soared to multi-decade highs, prompted rapid monetary policy tightening and squeezing household budgets, just as Covid-19 related financial support was waning.

Inflation remains elevated and persistent across countries as they grapple with food and energy price shocks and shortages.

In the case of Uganda, the country saw a cost push inflation in 2022, which negatively impacted citizens, depending on their income.

The danger associated with cost push inflation is its possibility to reduce aggregate supply (the amount of total production) in the economy.

In an interview last week, Ubos director economic statistics Aliziki K. Lubega, told Daily Monitor the high inflationary levels during 2022 was a result of high commodity prices caused by both external and domestic factors.

Equally, according to the Bank of Uganda State of Economy report for December, whereas there has been muted movement, inflation remains persistently higher than the target.

However, on the other hand, Bank of Uganda said easing inflationary pressures reflect the impact of monetary policy interventions, which have curtailed the effect of the supply turbulences such as global supply chain disruptions and war-induced elevation of global energy and non-energy commodities prices.

The mixture in the prices of commodities, with some increasing while others have slowed down, has, however, slightly pushed down inflation in the past two months.

Ubos indicated that inflation for the 12 months to December reduced to 10.2 percent, compared to 10.6 percent in November due to price movements in commodities that fall under core inflation.

In particular, the increase in price of commodities is attributed to other goods inflation registered at 12.4 percent in the year ended December, compared to 12.8 percent in November.

During the period, maize flour inflation increased to 95.7 percent from 94 percent while rice inflation dropped to 42.6 percent compared to 46.7 percent in November.

Laundry soap, which has witnessed one of the most volatile price movements this year, saw inflation rise by 55 percent in December compared to 21.6 percent in the same period last year.

During the period, sugar inflation rose to 45.7 percent compared to 3.4 percent in 2021 while cassava flour inflation rose to 98.6 percent from 6.7 percent in 2021. 

Overall, Aliziki indicated, annual food crops and related items inflation increased to 29.4 percent in December, from 27.8 percent in November due to vegetables, tubers, plantains, cooking bananas and pulses inflation, which rose to 39.7 percent from 35.4 percent.

Specifically, matooke (bunch) and dry beans inflation rose to 77.9 percent and 30.2 percent, respectively. 

During the period, energy fuel and utilities inflation, Ubos noted, dropped to 10.6 percent from 12.2 percent in November due to a decline in fuel prices.

Liquid energy fuels inflation dropped to 24.8 percent from 32.7 percent due to a drop in petrol inflation which decreased to 22 percent in December from 33.5 percent in November.

Bank of Uganda projects inflation to average between 6 and 8 percent this 2023, before converging back to the 5 percent medium-term target.