Annual inflation rate further soared to 38.1 percent in June from 34.7 percent a month earlier, the Central Statistical Agency (CSA) reported this week. This escalation in the cost of living that stands at another two year high could further be exacerbated by a public expenditure boost which has been flowing into the economy since July 8, an economist said.

The CSA Consumer Price Index said the year-on-year food inflation increased by 45.3 percent in June 2011 as compared to the inflation observed in June 2010.
“Relative rises were observed in the indices of most components of food, especially: teff, wheat, maize, barely, pulses, meat, butter, coffee & tealeaves, peppers , potatoes, tubers and stems and others,” the CSA said in its report.

Though food costs, which account for about 57 percent of households’ expenses, remain on the rise, their rate of growth has slowed down. “The data reveals that the rate of increase in prices of the food components has been at a slower rate than the one observed in May 2011,” the CSA said. Food inflation had jumped to 40.7 in May from 32.2 percent in April.

The annual non-food inflation rate has also soared by 45.3 percent in June 2011. It was 40.7 in May.

Prices particularly food costs that were deflating a year ago in July, 2010 when the last budget year started, have been escalating since September’s 17 percent devaluation of the birr against major currencies including the dollar.

Approved by parliament last week, the federal government increased its budget by 39 percent to 117.8 billion birr budget.

“Rather than the increase in the public expenditure itself, inflation rises because the budget has a deficit of over 17 billion birr which is mainly covered by domestic borrowing. This means few options for an economy like Ethiopia’s, primarily it means borrowing from the central bank that will inject ‘new’ money into the market, ” an economist told Capital on Wednesday.

Prime Minister Meles Zenawi, who unsuccessfully promised a single digit inflation rate for the budget year that ended on July 7, made a pledge to reverse the escalation of prices.

Admitting his government failed to control excessive monetary growth which triggered inflation; Meles told parliament last week that the government will cover the budget deficit through the sale of bonds and increased tax revenue.

The International Monetary Fund (IMF) in May said broad money had risen by 35 percent at the end of March at the same time as a rapid expansion of the central bank’s balance sheet.

The budget saw a domestic financing surplus in the first half of 2010/11 but there was significant recourse to central bank financing as the Treasury bill market collapsed, reflecting highly negative interest rates, the IMF explained. They argued that this was the principal cause of the inflation.

“The mission sees lower growth for 2011/12, at about 6 percent, on account of high inflation restrictions on private bank lending and a more difficult business environment,” the IMF statement read.

The government rejected IMF’s forecast and insisted it will be able to attain the 11 percent minimum growth rate it has set between 2010 and 2015.

CapitalEthiopia