{UAH} BOU ADMINISTERED A WRONG MEDICINE TO INFLATION
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The Annual Headline Inflation for the year ending September 2015 increased to 7.2 % compared to the 4.8% that was recorded for the year ended August 2015. The increase is largely attributed to the Annual Food Crops Inflation that rose to 10.2% for the year ending September 2015 compared to 1.8% that was registered during the year ended August 2015.
Similarly, Annual Core Inflation increased to 6.7% for the year ending September 2015 compared to 5.5% registered for the year ended August 2015. The Annual EFU declined to 3.8% for the year ending September 2015 compared to 3.9% that was recorded in August 2015. This is according to a Uganda Bureau of Statistics Press Statement.
Last month a wrote an article questioning the measure of Mutebile to tackle inflation. Among things that I highlighted; was that Mutebile was dealing with demand pull inflation. A situation where demand surpasses supply. However, Mutebile forgets that largely the inflationary tendency in the country now is eminently is as a consequence of increased cost of production. So our economy is suffering from cost push inflation. Mutebile must know that cost of production has augmented by more than 40% in last five years.
The Mutebile strategy to tackle inflation during the year that ended in August 2015 had the following short comings or miscalculations
The increasing of 1.5% on the borrowing rate aimed at tackle demand pull inflation; but Mutebile did not consider the fact that our economy is not yet at full employment. Our short in supply is not as a result of huge demanding force, but rather inability to exploit all resources available for production. How do you encourage production when its cost is hiking day after the other? And more so you limit money in circulation when some resources aren't exploited?
In long run; increasing borrowing rate it creates more cost pull inflation & demand pull inflation but in a short run, it can check on demand pull inflation. Mutebile by increasing the borrowing rate could have reduced inflation in month of September as more famers would plant most of food crops...adversely reducing supply and as well reducing demand. However, in long run, the farmers are either going to incur loses because of high cost to produce ( high prices of inputs) or they will sell at abnormal higher prices to cover high costs. But who will purchase at a higher prices?
Therefore, Mutebile should in first place know that our economy is not at full employment of all factors of production & it is ridiculous of government and BOU to think of Demand pull inflation. The only sound remedy to an economy of Uganda, is to break the inability to exploit all resources available for production process. This can be checked on by only subsidising on agricultural inputs, increasing government expenditure on production processes until there is relatively sound employment of factors of production. reducing the rate such that producers can easily get money & facilitate production. But never whatsoever to reduce money in circulation.
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-- Similarly, Annual Core Inflation increased to 6.7% for the year ending September 2015 compared to 5.5% registered for the year ended August 2015. The Annual EFU declined to 3.8% for the year ending September 2015 compared to 3.9% that was recorded in August 2015. This is according to a Uganda Bureau of Statistics Press Statement.
Last month a wrote an article questioning the measure of Mutebile to tackle inflation. Among things that I highlighted; was that Mutebile was dealing with demand pull inflation. A situation where demand surpasses supply. However, Mutebile forgets that largely the inflationary tendency in the country now is eminently is as a consequence of increased cost of production. So our economy is suffering from cost push inflation. Mutebile must know that cost of production has augmented by more than 40% in last five years.
The Mutebile strategy to tackle inflation during the year that ended in August 2015 had the following short comings or miscalculations
The increasing of 1.5% on the borrowing rate aimed at tackle demand pull inflation; but Mutebile did not consider the fact that our economy is not yet at full employment. Our short in supply is not as a result of huge demanding force, but rather inability to exploit all resources available for production. How do you encourage production when its cost is hiking day after the other? And more so you limit money in circulation when some resources aren't exploited?
In long run; increasing borrowing rate it creates more cost pull inflation & demand pull inflation but in a short run, it can check on demand pull inflation. Mutebile by increasing the borrowing rate could have reduced inflation in month of September as more famers would plant most of food crops...adversely reducing supply and as well reducing demand. However, in long run, the farmers are either going to incur loses because of high cost to produce ( high prices of inputs) or they will sell at abnormal higher prices to cover high costs. But who will purchase at a higher prices?
Therefore, Mutebile should in first place know that our economy is not at full employment of all factors of production & it is ridiculous of government and BOU to think of Demand pull inflation. The only sound remedy to an economy of Uganda, is to break the inability to exploit all resources available for production process. This can be checked on by only subsidising on agricultural inputs, increasing government expenditure on production processes until there is relatively sound employment of factors of production. reducing the rate such that producers can easily get money & facilitate production. But never whatsoever to reduce money in circulation.
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