Clearing the Muddy Waters: An attempt to decompose the impacts of inflation on the Ghanaian economy and on the welfare of Ghanaian citizens in light of recent political rhetoric on inflation

Osiakwan, Rita Otopea; Armah, Stephen E.
September 2013
Journal of Economic Development, Management, IT, Finance & Marke;Sep2013, Vol. 5 Issue 2, p32
Academic Journal
Paradoxically the causes, measurement and implications of inflation are yet to be fully grasped by both the electorate and the mass media of some developing countries like Ghana. Consequently, in every Ghanaian electoral cycle since 1992, inflation becomes "an issue." However, it is evident that for effective planning and policy implementation as well as evaluation of developmental projects inflation needs to be properly understood, measured and accounted for. This is often not the case in Ghana. Inflation is often not accurately measured and almost no contracts are indexed for inflation. Rather committees like "the fair wages commission" are tasked with ensuring that workers are paid "fairly", a subjective exercise. The run up to and the aftermath of Ghana's 2012 election is replete with discussions, albeit often misguided, about inflation. While one of the two dominant political parties in Ghana (the party in power or the National Democratic Congress) touts the importance of keeping inflation low the other party (the opposition party or the New Patriotic Party) conveniently brings up the short-run Phillips Curve relationship between low inflation and high unemployment. Given the ambiguity in the development literature and political rhetoric about the effects of inflation, this research seeks to answer the following questions: (a) Why is inflation such an issue in Ghanaian politics and what are the palpable effects of inflation specifically on the welfare of the average Ghanaian and (b) what is the implication of changing levels of inflation on standard of living of Ghanaians? The research uses mainly quantitative techniques and employs secondary data on inflation rates to answer the research question although qualitative data obtained from questionnaires and interviews were also analyzed. The research finds that inflation causes confusion for the Ghanaian electorate and entrepreneurs in terms of long term planning and may lead to misallocation of resources that can exacerbate poverty. The research also finds a statistically significant inverse relationship between inflation and standard of living in Ghana even in the short run. Standard of living is only partially sensitive to inflation however the adverse impact of inflation on standard of living increasingly worsens as inflation increases. Therefore in Ghana, people are increasingly worse off as inflation increases. The researchers recommend that policy makers and the government should devote more effort to ensuring that inflation levels are kept low. Further, since qualitative data gathered by this research suggest that inflation is not properly measured in Ghana and often deviates from logic it is essential that the government ensures that inflation is properly tracked by insisting on strict adherence to the different steps in estimating the CPI and corresponding inflation rate.


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