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Fuel price up: Government losing war on inflation

 

That history repeats itself seems to be true in Zimbabwe. At the height of the hyperinflationary era which ended in 2009, then Reserve Bank of Zimbabwe governor Gideon Gono would repeatedly say, “Inflation is Zimbabwe’s number one enemy.” Fast forward to 2019, current Finance minister Mthuli Ncube seems to be singing the same hymn as government battles to contain inflation which has effectively wiped out domestic savings. Workers are now agitated and are threatening to go on strike. The central bank was on overdrive printing notes which eventually became worthless after market forces pushed for dollarisation. Along the way several instruments were introduced in an effort
to arrest rising but it yielded little or result. On Monday, the Zimbabwe Energy Regulatory Authority announced new fuel prices. The maximum pump price for diesel rose to $7.19 from $5.84/litre last week while blend per litre increased to $7.47 from $6.10. This is the second increase in just over a week. Fuel prices and inflation are often seen as being
connected in a cause-and-effect relationship. As the price of petroleum products moves up or down, inflation follows the same direction. However, this relationship between oil and inflation started to deteriorate after the 1980s in other economies. During the 1990's Gulf War oil crisis, crude oil prices doubled in six months to around $40 from $20, but CPI remained relatively stable, growing to 137.9 in December 1991 from 134.6 in January 1991. But that cannot be said in Zimbabwe.

Year-on-year inflation for the month of June rose to 175.66 percent, the highest in 10 years. This immediately evoked fears that Zimbabwe could be retracing the hyperinflationary era. The year on year food and non-alcoholic beverages inflation was at 251.94 percent whilst the non-food inflation rate was 143.94 percent. The month on month inflation rate in June 2019 was 39.26 percent advancing 26.72 percentagep oints on the May 2019 rate of 12.54 percent raising fears that the economy is heading towards hyperinflation. With the real sector underperforming, domestic output will for the larger part of the year remain subdued while imports will grow. Under this current mono-currency system, a growing import bill will push the exchange rate and ultimately consumer prices. As it stands government seems to be losing its battle on inflation as there are no quick-wins to turnaround the economy. We still maintain our view that annual inflation by year end should be around 480 percent.

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