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Rising inflation leads to more inequality, lack of food, suffering

Rising inflation leads to more inequality, lack of food, suffering

By Josef Kefas Sheehama.

The highest recorded annual inflation rate in the past ten years was 6.7% in June 2016 from an average rate of 3.4% in April 2015. However, in June 2022, Namibia’s annual inflation rate approached the previous record, increasing to 6% from 4.10% recorded in June last year.

This week, the South African Reserve Bank is expected to hike the SA repo rate by 50 basis points on 21 July 2022. With the Namibian economy closely linked to South Africa, with the Namibian dollar pegged one-to-one to the South African Rand, this means that the Bank of Namibia must respond to any changes effected by South Africa. I strongly believe that the Monetary Policy Committee of the Bank of Namibia will increase the repurchase rate by 50 basis points to 5.25% from 4.75% on 17 August 2022 and I further anticipate that the MPC will hike interest rate by 175 basis ppoints by end-2022.

My expectation is that inflation will probably peak around 7.50% in September and then slightly scale down near the end of 2022. Consequently, one of the most serious repercussions resulting from such a heavy interest rate increase is the threat to food security, since such a sharp increase will once again drive up the price of basic foodstuff, leaving even more Namibians food vulnerable.

Driving up such inflation was the rise in the prices for items such as electricity, gas, fuel, food and transport exacerbated by the Russia-Ukraine war. To policymakers, inflation hampers economic growth and development as it discourages investment and savings. The persistence of such high inflation and the strength of the Bank of Namibia’s moves needed to squash it, are also once again sharpening fears a recession is on the horizon.

As the cost of living rises, just glancing at your electricity units could be enough to send you into a downward spiral. The cost of living is rising, creating new economic uncertainty on the tail end of a very uncertain two years. The result could be more mental strain, stress and anxiety. In and of itself, inflation is not necessarily tied to declines in mental health. The impact on individuals depends heavily on their financial situations. For example, someone deeply in debt can benefit from inflation because each dollar they have to pay back is worth less, effectively shrinking their debt. But if that person’s income doesn’t rise along with inflation, they may end up in a worse financial shape.

The result of continuing inflation, then, could be to deepen economic inequality, a problem that existed well before the pandemic and the Russian-Ukraine war. Growing economic inequality has been a significant long-term issue. And we now live in a world where the external shocks have made some people wealthier than they already were, but for people who are at the bottom, they have never been more insecure.

Furthermore, this rise in prices is considerably higher than the increase in average earnings. Inflation is clearly something that bites on people’s household income. I’m sure they’re already feeling that in terms of prices that are going up. Employers are unlikely to compensate their staff for this extra and might well limit pay rises. Additionally, as inflation rises, it erodes the spending power of your hard-earned cash. So it’s important to make sure your money is working hard for you. But it’s almost impossible to find a savings account to beat inflation at the moment. Everyone’s going to be hit, and it will feel like a big squeeze for everybody. It’s going to feel like a catastrophe for lower-income households if nothing changes.

Moreover, the approval to import age restrictions for non-commercial vehicles up to twelve (12) years constitutes dual effects. Different sectors will be impacted differently and will be the determining factor of how company prices will be affected. Namibians are likely to find themselves paying more for loans this year. Tightening monetary policy raises the costs of borrowing for consumers and businesses, weakening demand and curbing prices. But it could also pinch people’s budgets as the Bank of Namibia continues to normalize policy over the rest of 2022. Money will become more expensive. The Bank of Namibia is realizing that by having so much cheap money available, it is really causing a lot of consumers to spend. Over-expansion of the money supply can also create demand-pull inflation. The money supply is not just cash, but also credit, loans, and mortgages. When the money supply expands, it lowers the value of the dollar. When the dollar declines relative to the value of foreign currencies, the prices of imports rise.

When inflation gets too hot, the government has to shift to a contractionary fiscal policy. These measures, such as hiking interest rates and increasing the cost of borrowing, could slow economic activity and depress standard prices. The result will be even higher costs for businesses, and a deep squeeze in the cost of living for households.

To this end, on top of that is whether the spike already seen in inflation will scare Namibian households into speeding up purchases to get ahead of any further price increases. That could create its own feedback loop, driving prices higher.

It’s a concern because when you’re battling inflation on multiple fronts it’s not just the supply chain, it’s not just the labour market shortages, it is not just the Russia-Ukraine war, but now you’ve got the consumer who’s also in the blend. It just increases the difficulty in bringing inflation under control.


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