Ghanaians Income suffering from Tanzi-Oliveira effect due to high inflation

Consumers’ real incomes are set to decline significantly following threats of further inflation hikes, Accra based Research firm, InvestCorp has said.


According to the firm, “with cost induced inflation, compensatory adjustments to declines in real income will be sluggish especially for private sector workers, requiring that inflation is reined in urgently to protect household income”.

Ghana’s inflation crossed double digits in January 2013, after settling at a low of 8.4 percent in September 2011. It peaked at 19.2 percent in March 2016.

Inflation declined slightly to 18.7 per cent in April 2016 but the National Statistical Office said it could go up following increases in utilities and fuel prices.

“Clearly, this 4-year price rally has noticeably affected consumption, and any indications of an extended elevated inflation level for Ghana will further worsen real incomes significantly”, it stated in its monthly report.

InvestCorp projected inflation to remain high at between 18 and 20 percent if crude oil prices record a marked upward movement in the next three months, which is more likely looking at recent market dynamics.

Oil hit US$50 for the first time this year last week.

The recent high inflation rates were on the back of pricing reforms for utilities, changes in electricity production mix and a severe power crisis.

InvestCorp also noted that with prolonged high inflation over the years, Ghana has little room to accommodate sudden reversal of crude oil prices.

This, according to the firm could result in a situation where inflation rate is high, economic growth rate slows, and unemployment remains steadily high.

It urged government to relax taxes on petroleum products to help control the escalating prices of the products.

“We believe that if crude oil prices begin to show sustained increases, Ghana must unwind some of its taxes on petroleum products, including its recently imposed levy and make cuts in non-priority public spending to contain the shocks,” InvestCorp stated.

Overall, it urged Ghana to take steps to protect consumer spending, which is critical for private sector investment and stronger medium term growth.

“We think that there should be a conscious effort not only to protect low income earners, but also to double the income of Ghana’s middle income class over the medium term – which requires relatively low, stable and predictable inflation.”

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