Many people have had contrasting experiences when they hear on the radio or TV that “inflation has dropped and hence prices of goods on the market are dropping”; however, they go to the market and realise that tomatoes still cost more than last month.
The culprits in this kind of communication are mostly political communicators who want to capitalise on a drop in inflation to score political points for their governments.
In the heat of political conversations, especially during press conferences, campaign rallies, and political discussions, it’s common to hear leaders boast that prices are “coming down” because inflation has dropped. However, the experiences of Ghanaians do not corroborate this claim.
Here’s the thing: Does a drop in inflation necessarily mean prices are falling? How is inflation different or similar to disinflation and deflation in our everyday life and economic activities.
Let’s break this down in everyday terms.
Inflation: The Price Elevator That Keeps Going Up
Let’s think of inflation like an elevator going up. It represents how fast prices are increasing over time. If inflation is at 50%, it means on average, the prices of goods and services are 50% higher than they were a year ago.
Let’s say you spent ₵300 last year on a basket of goods. With 50% year-on-year inflation, you’d now be buying that same basket of goods and services for around ₵450.
It is important to note that inflation is the average of the price changes of all the goods in the basket. It is possible that prices of some items in the basket might have reduced over the period, while some have increased. However, if the inflation is still positive or higher than 0, it means that generally you are paying more for the same basket of goods than a year ago. The higher the inflation, the faster prices are rising.
Disinflation: The Elevator Still Goes Up, But Slower
Now, imagine that inflation drops from 50% to 30%. This is called disinflation. It means prices are still going up, but not as fast as before. That basket of goods that jumped from ₵300 to about ₵450 might now move to about ₵585 over the next year instead of ₵675.
So yes, it’s good news, but not the kind that magically puts more change in your pocket.
This is where the public often gets confused and where politicians sometimes stretch the truth. A fall in inflation is not the same as a fall in prices. It simply means that prices are still rising, just at a slower pace.
Think of the elevator, which was moving faster a year ago but is now moving at a slower pace. Or it’s like driving a car that was speeding at 100 km/h, but you’ve slowed to 60 km/h. Yes, it’s better, but you’re still moving forward, not in reverse.
Deflation: When Prices Actually Fall
Deflation is the rarest of them all. This is when prices actually drop. Using our basket of goods example again, if there’s deflation, that ₵450 basket of goods might cost ₵430 next month. Sounds great, right? Not always.
It only happens when the inflation rate is negative or falls below zero, which is very rare. It has its own implications for the economy, which can be discussed another time.
In simple terms, it also like an elevator in reverse or a car in reverse.
What Should Ghanaians Do?
To further simplify, anytime you hear that inflation has dropped, ask yourself, is the new rate a positive number or higher than zero? If it’s higher than zero, it means that prices are still rising.
If the new rate is a drop from the previous rate and it’s still positive, let’s say from 18% to 13%, it still means prices are rising, but at a slower rate.
The moment you hear that the rate is negative, that is when you can expect a general drop in the prices.
Whenever you hear a politician say, “Inflation has gone down,” take a moment to ask: Are prices actually dropping, or are they just rising more slowly? Inflation is still inflation until prices stop rising, or better yet, start falling. Until then, whether you’re in the market, at the pump, or paying school fees, what really matters is how much of your income you’re left with after all is said and spent.
This finance expert, Joe Jackson, after the recent drop in inflation, put it beautifully that, “Inflation drops to 13.7% …. Hurray! But wait… before you celebrate like you’ve won the lottery, remember: Inflation down ≠ Prices down. Your Kenkey is still expensive. Plan smart, Spend wisely, This drop is hope, not magic. Let’s chop with sense and save for the future.”
So next time someone throws inflation stats at you, smile and ask, “But has my kenkey price come down?” That’s the real test.
