ZIMBABWE’S statistics arm, ZimStats, issued the latest blended inflation rate as the official inflation figures for the first time in the country’s history last week in a move that took the nation by surprise.
The adoption of the blended inflation was premised on an earlier publication that revealed that many of the market players in several sectors now transact mostly in the United States dollars (USD). The announcement also follows the directives in SI 27 of 2023, and previous calculations of inflation rates have since been abandoned. Many have taken to social to air their views, and we collate some of these views as we unpack the new developments.
A blended inflation rate, in the case of Zimbabwe, is a rate that combines the movement of prices in ZWL and USD in one figure and presents a picture of the movement in overall prices of goods and services.
However, in doing so, the statistics makes several bold assumptions that are off-the-mark. Among these are the assumptions that local transactions of all products in the inflation basket are done in some market-wide combination of both currencies that applies to every citizen and that the two inflation rates are simply additive and do not have any common underlying drivers.
We opine that the haste to “officialise” the blended inflation rate is an unorthodox route for policymakers to achieve their month-on-month inflation target in the range of 1 - 3% and indicates a fall to prey to groupthink. A blended inflation rate presents a picture of a successful approach to inflation targeting but ignores the repercussions on hyperinflationary reporting and general planning by economic agents.
Groupthink is a psychological phenomenon developed by social psychologist Irving Janis in 1972 to describe suboptimal decisions made by a group due to group social pressures.
It is a phenomenon in which the ways of approaching problems or matters are dealt by the consensus of a group rather than by individuals acting independently.
There are several symptoms of groupthink and some of them include:
An illusion of invulnerability;
Discounting warnings and negative feedback that may cause the group to reconsider assumptions being used; and
An inability for group members to express their own individual arguments against the group.
There are a few major events that have been attributed to this
phenomenon over the years, such as the Watergate scandal, Pearl Harbour bombing, and the 2008 global financial crisis.
While groupthink in this case will not result in catastrophic results like the examples above, it does point out to the necessity of critical evaluation of any directive and, in some case, a devil’s advocate prior to implementation. We turn to the economy and stock market and highlight some of the challenges that a blended rate poses.
An inflation rate is a measure of the change in the price of a basket of goods and services between two periods. Whether the price of the basket is in currency X or currency Y, the value is often the same.
If this is not the same, an arbitrage opportunity exists, but this is often temporaneous because of corrective measures that accrue from the economic laws of supply and demand.
Hence, it is much clear if the trend is tracked using a single currency and not a blend. Each currency is also affected by different variables, and these are inappropriately mellowed out in a blended inflation rate.
We also add that an inflation rate is often used as measure of stability in an economy. To that effect, central banks have inflation rate targets that they aim to stay within using instruments such as interest rates and open-market operations.
Given than inflation rates are often a function of interest rates, a blended inflation rate brings to question how the central bank will control an inflation rate if they do not have the authority to determine US interest rates.
In addition, another bold assumption of the ZWL’s influence on USD is made if the central bank intends to use the ZWL interest rate to tame blended inflation.
Different economic players face different economic realities, and a blended inflation rate imposes one economic view on the whole market.
Investment managers, who manage the Zimbabwe Stock Exchange (ZSE) portfolios can easily present an inflation-beating performance using the blended inflation to the detriment of the client, for example. On the other hand, portfolio managers in charge of VFEX stock portfolios will have a tough time explaining to their clients how they failed to match blended inflation in their performance.
On the ZSE, analysts and investors alike should prepare for a wave of distorted inflation-adjusted accounting results over the course of the year. A blended inflation rate will understate the effect of ZWL inflation and, in turn, overstate ZWL figures.
Inexplicable revenue growth in inflation-adjusted results in the absence of commensurate real growth is also to be expected.
Mtutu is a research analyst at Morgan & Co. — tafara@morganzim.com or +263 774 795 854.