It is common practice for producers to pass additional costs on to consumers. Consequently, frequent price increases by producers lead to regular price changes in retail markets.
However, it is emerging that Ghana’s trends of Producer Produce Inflation (PPI) and Consumer Price Inflation (CPI) for most part of 2024 are not conforming to the established economic principles raising concerns from analysts.
Both CPI and PPI are very critical economic indicators that measure inflation at different stages in the consumption and production processes respectively. While PPI is a measure of the average change in the prices received by domestic producers for their products and services, CPI measures the average change in the prices of a consumer basket of goods and services over time.
Under normal circumstances, there is a positive relationship between PPI and CPI where they both move in the same direction. When PPI goes up, in the following month, the CPI usually also goes up and vice versa.
Ghana’s 2024 PPI and CPI Trend
A trend analysis conducted by The High Street Journal has revealed that the PPI and CPI of Ghana for 2024 have been moving in opposite directions which defies the known economic principles.
Ghana’s PPI started the year at 17.1 % in January, and decreased to 11.9% in February, being the only exceptional reduction during the period under review. There was a rebound in March, recording 15.1%. It further increased to 16.6% in April and significantly rose to 23.4% in May. The upward trajectory continued in June and July recording 25.6% and 29.1% respectively.
On the CPI front, while PPI was on an increasing trajectory, inflation started the year in January at 23.5% slightly reducing to 23.2% in February. The rate however rose to 25.8% in March but continued with the downward trend in April dropping to 25%. The rate further dropped to 23.1% in May while recording reductions in June and July at 22.8% and 20.9% respectively.
The line graph below depicts the trend
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The rising PPI indicates that producers are facing higher costs or increasing production costs. Under normal circumstances, the rising producer costs should translate into rising consumer prices. However, the trend of the CPI depicts that the average change in prices paid by consumers for a basket of goods and services is rather slowing.
This divergence contrasts the conventional economic theory that suggests that rising producer costs should eventually be passed on to consumers, leading to an increase in consumer prices. However, the current data indicates the opposite, with consumers experiencing slowing prices despite rising costs for producers.
Implications of this Trend for Producers and Consumers
This trend has been found to have some possible implications for consumers and businesses.
The disparity means producers are grappling with increasing cost of production for goods and services which may lead to shrinking profit margins. This could be worse for producers that cannot raise their prices to match their increased costs. With this, there is the tendency that some producers may reduce production or even risk closing down. This could further lead to supply disruptions as there could be shortages of goods on the market risking inflationary pressures.
Moreover, as producers struggle with higher production costs that are not transferred to consumers, there is a potential for workforce reduction to cut costs in terms of wages. This could likely increase unemployment while wages remain stagnated.
The trend which signifies a “delayed inflation” also presents the likelihood of inflationary pressures in the future. That’s consumers may face the rising cost of goods as the “delayed’ inflation may resurface should producers decide to pass the rising costs to consumers.
Commenting on this development to The High Street Journal in an interview, Senior lecturer of Economics and Finance at the University of Ghana Business School, Prof. Godfred Alufar Bokpin agrees that based on economic principles, there is a positive relationship between PPI and CPI.
He however added that the relationship is not always straightforward as Ghana is currently experiencing.
“Of course, there is a link between the two, but the relationship isn’t always straightforward. At some point, you can have the CPI rising as the PPI is coming down. You also see the opposite of it. Even though when the PPI is going up, it gives direction that the CPI should also be going up from a more theoretical point of view, it is not always the case. Sometimes you don’t see that direct relationships,” Prof. Bokpin explained.
He further explained that there are some nuances that cause these distortions which affect the direct relationship. In the case of Ghana, he asserted that although the rising PPI may not be reflected in the overall inflation, it might be reflected in the local inflation component of the headline inflation which has been consistently higher than imported inflated.
“Somewhere along the line, local inflation started heading up while imported inflation started declining. That is one way to look at it,” he indicated.
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He further indicated that it might also be possible that producers are not passing on the rising production cost to consumers hence causing the distortions.
“And then the PPI, all of that may not be passed on to consumers. Sometimes, nuances can create some distortions. There is the possibility that the rising cost at the PPI level may not be passed on to the consumer at the CPI,” he noted
He continued, “Sometimes, they can pass it on and also add their margin, and sometimes too they will absorb it. The other thing to also bear in mind is taxes. Before the PPI gets to the CPI, taxes are loaded but they are measuring changes at different numbers.”
Prof. Bokpin however contended that the trend identified by The High Street Journal is something that the Ghana Statistical Service and other analysts should be interested in investigating so that the empirical root cause of the trend could identified. This, he believes will help to avert any possible negative impact of the trend on producers and consumers should development be persistent.
