Major causes of inflation in Zimbabwe

IntroductionInflation can be described as a tendency for the general price level to increase over a given time [http://www.ntsearch.com/search.php?q=time&%3Bv=56] period. It can also be viewed as a case where too much money [http://www.ntsearch.com/search.php?q=money&%3Bv=56] is chasing few goods. Inflation is usually measured by the Consumer Price Index (CPI) where a representative basket of consumer goods is analysed for changes in the price level over a defined time [http://www.ntsearch.com/search.php?q=time&%3Bv=56] frame.Generally, inflation results from demand pull, cost push and imported inflation. Demand pull arises due to supply side bottlenecks which will be outweighed by increased demand. Cost push inflation results when manufacturers and producers of goods and services pass the increases in the costs of production to their customers and this is reflected in the price increases. Imported inflation results from increased costs in the acquisition of forex and this will be passed to the customers as higher price.Causes of Inflation in Zimbabwe since 1999Rise in the international oil pricesThe rise in the oil prices led to general increase in prices of most commodities [http://www.ntsearch.com/search.php?q=commodities&%3Bv=56] in the country as fuel is a major input in most manufacturing and transportation sectors. The rise in the oil prices occurred in the third and fourth quarter of 1999. Zimbabwe does produce oil, so it depended on imports, so an increase in the price on the international market as result of OPEC cartel agreements, will drastically increase prices of most goods and this is a classic example of imported inflation.Fiscal deficitsBudget deficits have been increasing more rapidly since 1997 after payment of the war-veterans gratuities which were not budgeted for in the national budget. This was followed by the entry into the DRC war which was estimated to cost billions of dollars for the two year stay. The effect of high budget deficits as well as fiscal expansion resulted in debt-trap because of higher interest payments. This could lead to printing [http://www.ntsearch.com/search.php?q=printing&%3Bv=56] of money [http://www.ntsearch.com/search.php?q=money&%3Bv=56] to finance [http://www.ntsearch.com/search.php?q=finance&%3Bv=56] some of these activities and results in inflationary environment.Rapid Money [http://www.ntsearch.com/search.php?q=Money&%3Bv=56] supply growthAccording to Milton Friedman “inflation is always and everywhere a monetary phenomenon”. The quantity theory of money [http://www.ntsearch.com/search.php?q=money&%3Bv=56] (MV=PT) leads us to agree that the growth in the quantity of money [http://www.ntsearch.com/search.php?q=money&%3Bv=56] is the primary determinant of the inflation rate since V(velocity of money [http://www.ntsearch.com/search.php?q=money&%3Bv=56] circulation) and T (the number of transactions within an economy) are assumed to be constant. This view implies that periods of high money [http://www.ntsearch.com/search.php?q=money&%3Bv=56] growth tends to have higher inflation rates. Increase in the money [http://www.ntsearch.com/search.php?q=money&%3Bv=56] supply was experienced by the involvement in the DRC war as well as the high budget deficits which are now in excess of 10% of GDP.Property [http://www.ntsearch.com/search.php?q=Property&%3Bv=56] Price BubbleZimbabweans in the diaspora were investing [http://www.ntsearch.com/search.php?q=investing&%3Bv=56] in property [http://www.ntsearch.com/search.php?q=property&%3Bv=56] such as houses [http://www.ntsearch.com/search.php?q=houses&%3Bv=56] and given the fact that there are more than 2million Zimbabweans living outside the country this created to much demand and forced the prices up. From 2001 banks [http://www.ntsearch.com/search.php?q=banks&%3Bv=56] also started investing [http://www.ntsearch.com/search.php?q=investing&%3Bv=56] in property [http://www.ntsearch.com/search.php?q=property&%3Bv=56] as a way of hedging against inflation as well as for speculative reasons and this further fuelled property [http://www.ntsearch.com/search.php?q=property&%3Bv=56] prices.The acquisition of property [http://www.ntsearch.com/search.php?q=property&%3Bv=56] led to liquidity problems for most the banks [http://www.ntsearch.com/search.php?q=banks&%3Bv=56] as their money [http://www.ntsearch.com/search.php?q=money&%3Bv=56] was tied up in assets which are proving difficult to off-load quickly. People [http://www.ntsearch.com/search.php?q=People&%3Bv=56] who had properties were encouraged to spend more as they were observing their assets appreciate in value thus creating an additional aggregate demand within an economy, this has an inflationary tendency.Land ReformsThe implementation of the land reforms or farm invasions in 1999 resulted in supply-side bottlenecks in terms of output produced. Output was low due to the disturbances in the farming sector and this was further worsened by uncertainty in relation to land-ownership rights. The uncertainty led to reduced farming activity as this led to reduced agricultural output. Demand for food [http://www.ntsearch.com/search.php?q=food&%3Bv=56] outweighed supply and this resulted in shortages and the birth of parallel market which translated to higher prices thus contributing to inflation levels. Land reforms also initially disturbed other cash crops such as tobacco which is the major export earner for the country.DroughtThis is also another supply-side constraint that was experienced in 2001-2002 agricultural seasons. The droughts resulted in low harvests and the supply of food [http://www.ntsearch.com/search.php?q=food&%3Bv=56] was low and this forced people [http://www.ntsearch.com/search.php?q=people&%3Bv=56] to compete for the available food [http://www.ntsearch.com/search.php?q=food&%3Bv=56]. The effect was the mushrooming of the parallel market which led to higher prices for food [http://www.ntsearch.com/search.php?q=food&%3Bv=56] related commodities [http://www.ntsearch.com/search.php?q=commodities&%3Bv=56].Monetary PolicyThe monetary policy for 1999 and 2001 advocated for cheaper money [http://www.ntsearch.com/search.php?q=money&%3Bv=56] with the main aim being of assisting exporters as well as other productive sectors within the economy such as construction [http://www.ntsearch.com/search.php?q=construction&%3Bv=56] and mining. This resulted in a negative real interest rate and this encouraged most firms and households to borrow very cheaply. However, this facility was abused as individuals also borrowed for consumption purposes and to some extent for speculative purposes. When interest rates are lower individuals have a tendency of consuming more and this results in the increased demand for food [http://www.ntsearch.com/search.php?q=food&%3Bv=56] and other durable goods, and prices are likely to go up in such a case.Wage to Wage spiralThis refers to case where one sector in the economy awards wage increments that are higher than the others, and this to other sectors demanding such an increment as well. However, the problem arises when the wage increments in all the sectors of the economy are not match [http://begin2search.com/cgi-bin//ezlclk.fcgi?id=12]ed by productivity as this tends to increase the aggregate demand which is not in line with the aggregate supply of goods and services within that economy. The mismatch of aggregate demand and aggregate supply in this case leads to shortages thus inflation. This is the case because increased wages (increases disposable income) are met with either a stagnant or even falling output.Trade UnionsThis is linked to the wage to wage spiral. In this case labour unions (ZCTU) became powerful in 1999 which resulted in the formation of MDC. They advocated for wage increases that were not matched with productivity but linked to the rate of inflation. The effect is the same as in the above explanation.