FDC ECONOMIC BULLETIN – JANUARY 07, 2021 (Re: Headline inflation to continue its runaway trend in December 2020)

Dear Subscriber,

The NBS is likely to release its December inflation data next week. Based on our survey and regression model, headline inflation is expected to increase by 0.51% to 15.4% in December 2020. This will be the highest level in 3 years. The continued rise in the general price level is driven largely by forex rationing, output and productivity constraints, higher logistics and distribution costs.

The comforting news is that the rate of increase in inflation is expected to decelerate, which means higher inflation at a slower rate. This could be interpreted to mean that the re-opening of the land borders and the harvest is beginning to taper inflationary pressures. Also worth mentioning is a possible decline in the month-on-month inflation to 1.2% (annualized 16.71%) from 1.6% (annualized 21.17%) in November.

The survey also reveals a reduction in aggregate demand in December 2020 relative to 2019. Disposable income has been negatively affected by the electricity tariff hike, general reductions in subsidies and improved tax mobilization.

A peer group comparison shows that countries that maintain interest rates higher than the rate of inflation tend to have a faster pace of economic recovery and sustainable macroeconomic stability.

The MPC will be meeting later this month. The continued rise in inflation will be a major consideration in the determination of the stance and the level of the MPR.

In the publication, the FDC Think Tank shares its estimates for December inflation and likely policy reactions.

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