Inflation rates have been trending downward rapidly recently ...but the partying is muted. As a child, my shirt was virtually tied to the apron-strings of my mother. That helped me to pick up an invaluable lesson in cooking groundnut soup – my childhood favourite. After everything had gone into the cooking pot, mum fetched about a quarter of the half-cooked soup and kept it in a separate pot while ensuring the fire under the cooking pot was appreciably high. She then went about other things, but instructed me to keep an eye on the soup and anytime it was near to boiling over into the fire I should put a ladle or two of the cold, half-cooked soup into the boiling soup to prevent it from boiling over into the fire – groundnut soup boils with a froth, which if left unchecked boils over into the fire. On occasions when the cold soup got finished and the cooking soup was still frothing, the best way of preventing a boil-over was to reduce the quantity of charcoal and thus reduce the heat. The effect was similar to adding more cold soup to the boiling one. I however observed that adding more cold soup finally gave you more well-cooked soup than when you used the second method of regulating the heat under the cooking pot. In a large, growing family, more soup was always preferable to less. Now let’s move from my mother’s humdrum kitchen to the more riveting kitchen of the national economy, but with a mind on lessons learnt from the former. Inflation can be regarded as the temperature of the national economy. Increasingly high inflationary figures are indicative of the whole economy boiling with a froth leading to the dissipation of much resources that otherwise could have gone to make the lives of a lot more people better. So the temperature must be kept at a reasonably manageable level where resources are not wasted. And how you do it is to either try creating more resources and wealth (just like pouring in colder, half-cooked soup into the boiling froth), so that even with high inflation, wealth is still created to meet the needs of citizens. You could also reduce the heat by dampening the source of the heat (pulling out more charcoal from the fire to reduce the heat under the boiling pot) by stifling economic activity through austerity measures. In this instance the heat is reduced, but with less soup to go all round. I admit this is quite simplistic, but it helps to demystify our fixation on a single-digit inflation figure. Since the inception of the Fourth Republic, single-digit inflation has become the target of every government; however, the effort and emphasis directed at achieving it has varied with various administrations. Between 2003 and 2008, the country achieved consistent economic growth - averaging about six percent annually and peaking at 7.3 percent in 2008. However, inflation trends within the period were not that consistent, with the country achieving a single-digit for a brief month. Ironically, in 2008, when the country recorded its highest economic growth rate, inflation was on the ascendancy. To use the analogy of my mother’s kitchen, more cold soup was being poured into the cooking pot even with a high fire underneath. Over the past year, inflationary trends have descended rapidly from 19.8 percent in January 2009, to the current 11.6 percent - and that has been achieved by stifling economic activity, analogous to the removal of charcoal from under my mother’s cooking pot. Meaning we have succeeded at reducing the heat but at the expense of the quantity of soup in the pot. Had we been adding more cold soup, we would have ended up with more. In a sense, I believe the whole debate about stabiliation at the expense of growth and vice versa comes down to how well we are able to manage the boiling of the economy; such that we minimise dissipation of resources while ensuring that we still produce increasing quantities of wealth to meet the demands of a growing population. It simply has nothing to do with single-digit inflation. Indeed, with the rapidity of the current drop in the inflation rate - judging by its impact on the standard of living of the average Ghanaian - it immediately prompts the thought about whether it is not about time we took a second look at the basket of goods we use in computing our inflation rate. Chances are our lifestyle may have changed in significant ways that we may not be aware of. For example, how many more of us are eating rice as a staple against the other staples in the country? And to the more complex issues of linking inflation rates to Bank of Ghana Prime rates - and by extension to lending rates of the banks, which invariably have a significant impact on the cost of production and prices of goods and services in the country - obviously there are many more crucial considerations rather than single-digit inflation. There is nothing magical about single-digit inflation. It does not guarantee automatic economic growth upon achievement. Indeed, it does not even guarantee any growth at all; meaning in pursuit of the sort of economic growth that ensures that our growing population enjoys higher standards of living, there is bound to be inflationary pressures - and we may not be able to sustain a single-digit for long. Simply put, we would be better off focusing our energies on generating growth in our economy and trying to minimise the negative effects arising from that pursuit, such as rising inflation, rather than focusing our energies on bringing inflation down to a magical number and hoping that it will somehow engender the kind of growth we all know is needed to propel our economy into a middle-income status. The pursuit of growth will allow us to shift some focus towards other critical issues such as the cumbersome judiciary processes in disposing of commercial cases, which invariably has an impact on the determination of banks’ lending rates, for instance, and adds to the cost of doing business and consequently undermine economic growth. It would also embolden us to focus on addressing other administrative and infrastructural bottlenecks, inimical to economic growth. Little wonder not too many people are celebrating our rapidly declining inflation. Low inflation does not seem to mean a lot to Ghanaians anymore. Source: BFT