Decline In Inflation Does Not Mean Prices Have Reduced – Economist

An economist, Mr. Osei Kwaku Tuah, has clarified that a decline in Ghana’s inflation rate does not mean that prices of goods and services have gone down, warning against what he described as a common public misinterpretation of inflation data.

Speaking in an interview with Kofi Boakye on Nkwantannanso on Opemsuo Radio, Mr. Tuah explained that inflation measures the rate at which prices increase, not an actual reduction in prices.

“When we say inflation has decreased, it does not mean that the prices of goods and services have gone down,” he said. “What it means is that the rate at which prices are increasing has slowed.”

According to him, prices can still be rising even when inflation is falling, but at a slower pace than before. He stressed that an actual fall in prices is known as deflation, which poses serious risks to the economy.

“A decrease in inflation does not mean prices will become low. If prices actually fall, that is deflation, and it can cause serious problems,” Mr. Tuah cautioned.

He added that, if deflation happens, many companies may collapse because they will not be able to recover their cost of production.

He further noted that extremely low inflation levels could also be dangerous, requiring government intervention to stabilize the economy.

“If inflation drops to 1% or below, then there is a problem. Government will have to intervene to push inflation slightly higher,” he explained.

Mr. Tuah also shed light on how inflation is calculated, noting that it is based on a basket of goods and services, including food, transport, utilities and energy. He explained that changes in heavily consumed items can significantly influence the overall inflation rate.

“If there is one item that people consume heavily and its price reduces, it can pull the overall inflation rate down, even if other items remain expensive,” he said.

He cited fuel prices as an example, explaining that a reduction in fuel prices could lower inflation even when utility costs rise, because fuel consumption often outweighs utility usage.