The Causes of Hiking Ethiopian Consumer Prices

Authors

  • Kedir Bekeru Genemo

    Economic Modeling and Statistical Analysis Directorate, National Bank of Ethiopia and Part time Lecturer at Addis

    Ababa University, Addis Ababa, 5550, Ethiopia

DOI:

https://doi.org/10.30564/mmpp.v5i1.5510

Abstract

A growing consumer price is creating instability in the macroeconomic environment and hinders the consumption level of especially the poor society. This paper then explored the major causes of such increasing consumer prices using Ethiopian cases. Using data from the National Bank of Ethiopia from 1982/1983 to 2019/2020, it condensed the information of monetary sector, external sector and fiscal sector variables to a small set to estimate the causes of Ethiopian consumer price hiking using the ARDL model. The factors determining consumer price differ from food to non-food. The most important factors determining food price are price expectation and fiscal factors. On the other hand, the main determinant of non-food consumer prices is the fiscal factor. The author also found evidence of fiscal factors and price expectation effects on general consumer prices. Therefore, to contain the rise in consumer prices, it needs to exercise conservative fiscal stances, which require minimizing deficit financing, reducing the import tax rate and reducing domestic indirect tax rates such as excise tax and value added tax on basic consumer goods and services. Moreover, sound government policies are essential to address inflation anticipations (providing information for society about the future of inflation) to change public opinion.

Keywords:

Price inertia; External factor; Grain price; Fertilizer price; Principal component analysis

References

[1] Adams, S.O., Awujola, A., Alumgudu, A.I., 2014. Modeling Nigeria’s consumer price index using ARIMA model. International Journal of Development and Economic Sustainability. 2(2), 37-47.

[2] Paul, M., Sharma, P., 2019. Inflation Rate and Poverty: Does Poor Become Poorer with Inflation? [Internet] Available from: http://dx.doi.org/10.2139/ssrn.3328539

[3] Tobias, A., Christopher, E., Fabio, N., 2022. Soaring Inflation Puts Central Banks on a Difficult Journey [Internet]. International Monetary Fund. Available from: https://www.imf.org/en/Blogs/Articles/2022/08/01/blog-soaring-inflation-puts-central-banks-on-a-difficult-journey-080122#:~:text=The%20costs%20of%20bringing%20down,likely%20have%20to%20rise%20significantly

[4] Gerdesmeier, D., 2009. Price Stability? Why Is It Important for You? [Internet]. European Central Bank. Available from: https://www.ecb.europa.eu/pub/pdf/other/whypricestability_en.pdf

[5] Seers, D., 1962. A theory of inflation and growth in under-developed economies based on the experience of Latin America. Oxford Economic Papers. 14(2), 173-195.

[6] Gaskin, D.J., Richard, P., 2012. The economic costs of pain in the United States. The Journal of Pain. 13(8), 715-724.

[7] Hess, G.D., Schweitzer, M., 2000. Does Wage Inflation Cause Price Inflation? [Internet] FRB of Cleveland Policy Discussion Paper. Available from: https://www.clevelandfed.org/publications/policy-discussion-papers/2000/pdp-0001-does-wage-inflation-cause-price-inflation

[8] Jaadi, Z., 2021. A Step-by-Step Explanation of Principal Component Analysis (PCA) [Internet]. Available from: https://builtin.com/data-science/step-step-explanation-principal-component-analysis

[9] Tsatsulin, A.N., Vasilyevich, B., 2016. Measuring the structural effects of cost inflation in industry. The-Economy. 5(251), 104-116.

[10] Hamilton, J.D., 2012. Import prices and inflation. International Journal of Central Banking. 8(1), 271-279.

[11] National Bank of Ethiopia, 2018/2019. Annual Reports [Internet]. Available from: https://nbebank.com/wp-content/uploads/pdf/annualbulletin/Annual%20Report%202018-19.pdf

[12] Eltis, W., 1983. The interconnection between public expenditure and inflation in Britain. The American Economic Review. 73(2), 291-296.

[13] Cepheus, 2019. Ethiopia: Macroeconomic Handbook 2019 [Internet]. Available from: https://cepheuscapital.com/wp-content/uploads/2019/01/Macroeconomic-Handbook-2019.pdf

[14] Asghar, N., Naveed, T.A., 2015. Pass-through of world oil prices to inflation: A time series analysis of Pakistan. Pakistan Economic and Social Review. 269-284.

[15] Mankiw, N.G., Kneebone, R.D., McKenzie, K.J., et al., 2007. Principles of macroeconomics. Cengage Learning: Stamford.

[16] Daniel, S.U., Israel, V.C., Chidubem, C.B., et al., 2021. Relationship between inflation and unemployment: Testing Philips curve hypotheses and investigating the causes of inflation and unemployment in Nigeria. Traektoria Nauki Path of Science. 7(9), 1013-1027.

[17] Kwon, G., McFarlane, L., Robinson, W., 2009. Public debt, money supply, and inflation: A cross-country study. IMF Staff Papers. 56(3), 476-515.

[18] Moseley, F., 2010. Criticisms of aggregate demand and aggregate supply and Mankiw’s presentation. Review of Radical Political Economics. 42(3), 308-314.

[19] Schwarzer, J.A., 2018. Retrospective: Cost push and demand pull inflation: Milton Friedman and “the cruel dilemma”. Journal of Economic Perspectives. 32(1), 195-210.

[20] Ireland, P., 2014. The classical theory of inflation and its uses today. Shadow Open Market Committee Meeting; 2014 Nov 3; New York. Available from: https://www.shadowfed.org/wp-content/uploads/2014/10/IrelandSOMC-November2014.pdf

[21] Rogers, J.H., Wang, P., 1993. High inflation: Causes and consequences. Economic Review. 4, 37-51.

[22] Feigl, G., Marterbauer, M., Rehm, M., et al., 2016. Macroeconomic trade-offs in the euro area. Revue de l’OFCE. (IAGS 2017), 129-171.

[23] Kim, J., Lee, E., Kim, S., et al., 2016. Economic burden of osteoporotic fracture of the elderly in South Korea: A national survey. Value in Health Regional Issues. 9, 36-41.

[24] Tatom, J.A., 1976. The welfare cost of inflation. Federal Reserve Bank of St. Louis Review. 53, 9-22.

[25] Sbia, R., Hamdi, H., 2020. Remittances and inflation in OPEC countries: Evidence from bias-corrected least-squares dummy variable (CLSDV) estimator. Economics Bulletin. 40(3), 2471-2483. Available from: https://hal.science/hal-03082806/

[26] Bedada, T.D., Demissie, W.M., Wolde, E.T., 2020. Determinants of inflationary experience in Ethiopia. Journal of Economics and Financial Analysis. 4(1), 15-54.

[27] Booth, G.G., Ciner, C., 2001. The relationship between nominal interest rates and inflation: International evidence. Journal of Multinational Financial Management. 11(3), 269-280.

[28] Desta, A., 2009. Economic growth for inflation: The Ethiopian dilemma [PhD thesis]. San Rafael: Dominican University of California.

[29] Filippo, G., 2015. Dynamic model averaging and CPI inflation forecasts: A comparison between the Euro area and the United States. Journal of Forecasting. 34(8), 619-648.

[30] Haji, J., Gelaw, F., 2012. Determinants of the recent soaring food inflation in Ethiopia. Universal Journal of Education and General Studies. 1(8), 225-233.

[31] Khan, R.E.A., Gill, A.R., 2010. Determinants of inflation: A case of Pakistan (1970-2007). Journal of Economics. 1(1), 45-51.

[32] Moser, G.G., 1995. The main determinants of inflation in Nigeria. Staff Papers. 42(2), 270-289.

[33] Narayan, P.K., Narayan, S., Mishra, S., 2011. Do remittances induce inflation? Fresh evidence from developing countries. Southern Economic Journal. 77(4), 914-933.

[34] Nkoro, E., Uko, A.K., 2016. ARDL model. Journal of Statistical and Econometric Methods. 5(3), 63-91.

[35] Nigusse, T., Tadesse, T., Melaku, T., 2019. Supply and demand side determinants of inflation in Ethiopia: Auto-regressive distributed lag model (ARDL). International Journal of Commerce and Finance. 5(2), 8-21.

[36] Lim, Y.C., Sek, S.K., 2015. An examination on the determinants of inflation. Journal of Economics, Business and Management. 3(7), 678-682.

[37] Durevall, D., Loening, J.L., Birru, Y.A., 2013. Inflation dynamics and food prices in Ethiopia. Journal of Development Economics. 104, 89-106.

[38] Alam, M.Q., Alam, M.S., 2016. The determinants of inflation in India: The Bounds test analysis. International Journal of Economics and Financial Issues. 6(2), 544-550.

[39] Abdi, H., Williams, L.J., 2010. Principal component analysis. Wiley Interdisciplinary Reviews: Computational Statistics. 2(4), 433-459.

[40] Mingione, F., 2011. Forecasting with principal components analysis: An application to financial stability indices for Jamaica. Kingston, Jamaica: Bank of Jamaica.

[41] Hayo, B., Hefeker, C., 2002. Reconsidering central bank independence. European Journal of Political Economy. 18(4), 653-674.

[42] Totonchi, J., 2011. Macroeconomic theories of inflation. International Conference on Economics and Finance Research. 4(1), 459-462.

[43] Greene, W.H., 2000. Econometric analysis. Prentice-Hall, Inc.: New Jersey. pp. 1-828.

Downloads

How to Cite

Genemo, K. B. (2023). The Causes of Hiking Ethiopian Consumer Prices. Macro Management & Public Policies, 5(1), 57–71. https://doi.org/10.30564/mmpp.v5i1.5510

Issue

Article Type

Articles