Josef Kefas Sheehama
Expectations about future inflation play a key role in driving inflation, as those views influence decisions about consumption and investment today.
Therefore, the long-term relationship between household savings and anticipated inflation is evident from the cointegration test.
Inflation remained uncomfortably rapid in October, despite a moderate in fuel costs, but other commodities remain fragile. Namibia’s annual inflation rate increased by 6% in October 2023.
The constant rise in fuel prices is noteworthy, but it does not address the overall problem of inflation.
Driving up such inflation was the rise in the prices for items, such as electricity, fuel, food and transport, exacerbated by the Russia-Ukraine war. As the cost of living rises, just glancing at your electricity units could be enough to send you into a downward spiral.
The cost of living is rising, creating new economic uncertainty on the tail end of a very uncertain three years.
If the persistence is rising inflation, you can rest assured the Bank of Namibia will act to protect the income of Namibia. The result of continuing inflation could be to deepen economic disparity, a problem that existed well before the pandemic and the Russian-Ukraine war. Growing economic disparity has been a significant and long-term issue.
Hence, fuel costs, intertwined with global oil prices and domestic taxation, further amplify the inflationary pressure. As transport costs rise, the effects ripple through the economy, affecting everything – from the price of daily commodities to the operational costs of businesses.
Furthermore, it is not all doom and gloom, and the good news is that there is light at the end of the tunnel. Global inflation is forecast to decline steadily, from 8.7% in 2022 to 6.9% in 2023, and 5.8% in 2024, due to tighter monetary policy, aided by lower international commodity prices.
Core inflation is generally projected to decline more gradually, and inflation is not expected to return to the target until 2025 – in most cases. We have witnessed declines in consumer price growth to below 5% in the UK. The US and Eurozone are fueling expectations that central banks could take their feet off the brakes and pivot to cutting interest rates in the first quarter of 2024.
This is a turning point for inflation, which will help Namibia see a decline in inflation. The current spike in inflation is described as imported inflation and easing inflation globally; this is good news for Namibia.
Therefore, globally, if I look at oil prices, crude oil is just under 2.5% of a typical inflation basket. That is pretty much what is going on at the moment.
Globally, inflation has begun to decline primarily because energy prices have eased since the summer and because supply chains, long gummed up by the pandemic, are operating more smoothly.
Yet, inflation remains a very long way from Bank of Namibia’s 3.6% target.
Moreover, we should understand that realised inflation spiked during October 2023 from 5.4% to 6% as released by the Namibia Statistics Agency (NSA).
In addition, there was a pronounced increase in the cross-sectional variation in realised inflation at that time, with some regions (zones) facing discernably higher inflation than others.
The composition of consumption baskets appears to be a main factor behind the increase in the across-regions variation in experienced inflation.
Therefore, as inflation expectations have been rising over these years, people have been becoming more pessimistic about the economic outlook – even as the economy shows signs of recovery. This pessimism about the outlook creates a downside risk for the recovery and suggests that policymakers should be wary of removing supportive measures too rapidly.
It would be desirable to combine realised, perceived and expected inflation to get a more realistic measure of how global factors impact domestic inflation.
Domestic inflation and economic outlook
The recent spike in inflation underscores Namibia’s intricate economic challenges, with food, electricity and fuel prices playing a pivotal role in the everyday struggles of Namibians.
With these economic tremors, the road ahead for Namibia consumers seems fraught with further obstacles, emphasising the pressing need for comprehensive solutions.
Additionally, as inflation rises, it erodes the spending power of your hard-earned cash. So, it is important to make sure your money is working hard for you.
However, it is almost impossible to find a savings account to beat inflation at the moment. Everyone is going to be hit, and it will feel like a big squeeze for everybody.
It is going to feel like a catastrophe for lower-income households if nothing changes. Also, when inflation gets too hot, the government might shift toward a contractionary fiscal policy.
These measures, such as hiking interest rates and increasing the cost of borrowing, could slow economic activity and depress standard prices. The result will be even higher costs for businesses and a deep squeeze in the cost of living for households.
The Bank of Namibia anticipated GDP growth to slow down in 2023 due to weaker demand in both global and domestic economies.
Real GDP growth is projected to moderate downwards to 3.3% in 2023 – from 4.6% registered in 2022.
Hence, the weak demand and high base effects from the diamond sector, which expanded by more than 45% in 2022, have a dampening impact on 2023 growth.
Global inflation and economic outlook For now, it looks like inflation will return to normal without a recession. Even though inflation has been slowing, prices are still growing much faster than the central bank wants. However, the escalation of worldwide geopolitical risks can result in oil price volatility. The trajectory of the Russia-Ukraine conflict and the Israel war with Hamas heightens concerns about the global economy.
These shocks have created uncertainty in the global political economy and weakened the world’s ability to recover from Covid-19.
This has generated new geopolitical tensions, exposed the fragility of the international relations system and pushed the world economy into a breakdown.
As war rages on between Russia and Ukraine, as well as Israel and Palestine, there is a burgeoning geopolitical crisis simmering in the background that has major implications for the future of international world trade. Therefore, the challenge for all these increasingly nervous lesser powers is not just whether they can retain a degree of policy independence but whether they can reconcile potentially incompatible geopolitical and geo-economics goals.
The answer to the global inflation crisis is to, therefore, create systems of production and work that offer everybody a nice life while averting geopolitics.
*Josef Kefas Sheehama is an independent economics and business researcher.