Politically palatable inflation figures?

Barely one month after shaking up the policy establishment with a presentation at the University of Cape Coast, which challenged the government?s claim of superior economic management, an economist, Dr. Nii Moi Thompson, has again questioned what he describes as ?the selective way in which government measures inflation,? and called on the managers of the economy to ?do the right thing.?

However, unlike the minority spokesperson on finance, former deputy finance minister, Moses Asaga, who described the latest inflation figures as ?cooked-up,? Dr. Thompson stopped short of dismissing the figures completely.

Speaking with The Chronicle in an interview a fortnight ago, he said the government?s preferred measure of inflation ? the year-on-year measure ? was technically flawed and does not fully capture ?contemporary price developments in the consumer goods market.?

?In February 2006, the year-on-year measure showed a decline in the inflation rate from 14.6 percent in January to 12.1 percent, despite a 10.0 percent increase in petroleum prices,? the outspoken economist stated, adding, ?But for the same February, the monthly measure of inflation showed an increase from 0.7 percent in January to 2.5 percent, which was reflective of the hike in the prices of petroleum prices and the subsequent increase in the prices of consumer goods.?

He asked: ?So which of the two do we operate with ? the politically palatable one, or the technically superior one? It appears in this case political expediency triumphed over technical accuracy, despite the fact that the decline of the year-on-year inflation rate in the midst of rising consumer prices in February was counter-intuitive and made nonsense of itself.?

When pressed to explain how the consumer price index (CPI), which is used to measure inflation, can provide contradictory information for the same month, Dr. Thompson offered the following explanation:

The monthly measure of inflation captures contemporary price movements in adjacent months, such as January and February, and is therefore more reflective of what consumers are experiencing now ? ?Now, meaning the past month or two.?

By contrast, the year-on-year measure, which the government favours, reflects both contemporary price developments and 12 month-old developments. Where the factors that informed the CPI one year ago overwhelm the contemporary ones, the effect is to produce inflation rates that bear no relation to price developments in the recent past (i.e., contemporary inflation. That?s what happened in February.

By technical coincidence, therefore, the year-on-year measure may only change in the same direction as the monthly measure, ?but we shouldn?t rely on coincidences in a matter of this nature,? he submitted, emphasizing, ?We need consistency. That?s crucial for market participants in their decision-making.?

As an additional example, he cited what happened in early 2004, when the year-on-year inflation rate fell steeply from 22.4 percent in January to 11.3 percent in February, leading to false hopes that the country was finally on the path to single-digit inflation. But for that same period, the monthly inflation rate rose from 1.08 percent to 2.54 percent. He said in that case, the CPI in February 2003, one year earlier, had been made ?unusually high? from the 90.0 percent increase in petroleum prices that year.

?A bigger or higher base one year earlier and a relatively small numerator one year later, even in the midst of rising consumer prices, meant a small percentage increase in the CPI ? year ?on-year. Not surprisingly, as we moved away from that policy-induced higher base to one determined by structural factors, the year-on-year inflation rate started rising away from the 11.3 percent. It peaked in August at 12.9 percent and closed the year at 11.8 percent ? so close, yet so far.?

He said consumer expectations are as important in determining the inflation rate as policy and structural factors, and that lower inflation rates, such as the monthly ones, would help shape and influence those expectations better than the ?perpetually high year-on-year rates.? Asked why he didn?t challenge the inflation figures earlier, the eminent economist said the initial report was based on a newspaper account and that given the technical nature of the inflation measure, he ?only expressed reservations about the figures,? pending sighting the full data from the Ghana Statistical Service. ?I didn?t want to make any wild allegations. If I must pass judgement one way or the other, it had to be on the basis of something concrete, and that something came from the Ghana Statistical Service later,? he said.

When asked about his views about the general health of the economy, he reiterated his claim that ?things are far worse than our leaders are letting on.? According to Dr. Thompson, surveys from the Ghana Statistical Service [Core Welfare Indicators Questionnaire ? 2003] and the Centre for Democratic Development (CDD) [2005] both had more than 50 percent of Ghanaians saying that life was hard and getting harder.

?It?s an important piece of information. It helps policy makers to reassess strategy and recalibrate policies. But the tendency has been to bury our heads in the sand and pretend that all is fine. We can?t address what worries us unless we first recognise that there is a problem. The longer we wait, the more the problem will fester and the greater would be the public dissatisfaction,? he stated.

He said the creation of a Millennium Development Authority by Parliament to manage a grant of any size from anywhere amounts to a ?shameful monument to our growing dependency on outsiders for everything from public toilets to a coach for the Black Stars, to the management of the national airline. Surely, we must be able to do something for ourselves, for crying out loud. Fifty years and begging more than ever! What a shame!?

He added that various indicators from the government?s budget statements show a dangerous and worsening state of dependency on foreign assistance for national development, noting that this would only ?prolong, not accelerate the process of our development.? He pointed to the fact that ?our share in capital expenditures, such as road and school construction, has declined from 48.0 percent in 2000 to only 21.0 percent in 2006. ?This is hardly a nation that is on the move,? he sighed.

He continued, ?It seems our leaders would rather perfect the art of begging endlessly around the world than promote the science of creative problem-solving at home. If we continue this way, we shall remain HIPC for the next century or two.?

On recent suggestions that government would raise petroleum prices, Dr. Thompson said that was unnecessary and that the current ?34,850 per gallon is already higher than it should be. ?It?s about ?5,000 higher than it should be.?

On that basis, he argued that government can raise the ex-refinery price of petrol to compensate TOR for the higher international prices, if they persist, possibly increase the margins for the oil marketing companies, and slash taxes to make up for the difference. He added that given the fact that the product is already over-priced, ?we can do all that and possibly still sell petrol for no more than ?32,000 per gallon, if not less.?

?Can you imagine the psychological boost that would provide for consumers and the economy?? he enthused. ?Petroleum prices coming down big time, not that thing they did the last time. If we sustain that, real disposal income will rise, demand for goods and service will follow, companies will expand and employ more people ? helping to reduce poverty ? and with a good tax administration, we can more than make up for whatever is lost.?

?You don?t raise prices because everyone else is doing it. Remember, everyone except Malaysia, devalued their currency during the 1997 Asian financial crisis. The IMF denounced them for that and even withheld aid. In the end, Malaysia got the last laugh. We could do the same in Ghana, too.?

He concluded by saying that the government should put together a team now to put in place an energy policy and strategy in view of the rising trend in crude oil prices. ?We must be long prepared before crude oil prices reach US$100. We can?t wait until we get there and then we say ?Well, we can?t do anything about it? and so we pass it all on to the consumer. That would bring hardships and possibly some social convulsions,? he concluded.