The annual inflation rate in Malawi rose for the sixth straight month to hit 34.3% in September 2024, up from 33.9% in the prior month of August 2024. Is Malawi’s economy experiencing a hyperinflation?
Inflation is a decrease in the
purchasing power of a currency (money), reflected in a general increase in the
prices of goods and services in an economy. This is usually measured using a
consumer price index (CPI), which measures the overall change in the prices of
goods and services that people typically buy over time.
CPI = Total cost of a basket of goods in current period/ Total cost of a basket of goods in base period * 100
The CPI statistics in Malawi is computed by the National Statistical Office of Malawi (NSO) every month. The figure below shows the CPI statistics for Malawi from September 2021 to September 2024.
An extremely rapid inflation is termed a hyperinflation, which is a situation where the prices of all goods and services rise uncontrollably over a defined time period. Generally, inflation is termed hyperinflation when the rate of inflation grows at more than 50% a month. The International Accounting Standards characterizes an economic environment of a country to be hyperinflationary when the cumulative inflation rate over three years approaches, or exceeds, 100%.
Cumulative inflation = ((CPI in current period / CPI in base period) – (1)) * 100 or
= ((CPI in current period - CPI in base period) / CPI in base period) * 100
The computation of cumulative inflation is based on CPI statistics, and in Malawi it is released by the National Statistical Office (NSO) every month. In the graph below, the three-year assessment points are from September 2021 to September 2024.
The cumulative inflation rate over a
three-year period, as of September 2024, exceeded the 100 percent mark, that is, it was 115.97 percent as of 30th September
2024. By this indicator alone, Malawi
is a hyperinflationary economy.
However, in addition
to this quantitative indicator, the International Accounting Standards, also
provide a set of four qualitative indicators of a hyperinflationary economy,
and these are:
- The general population prefers to keep its
wealth in non-monetary assets or in a relatively stable foreign currency.
Amounts of local currency held are immediately invested to maintain
purchasing power.
- The general population regards monetary
amounts not in terms of the local currency but in terms of a relatively
stable foreign currency. Prices may be quoted in that currency.
- Sales and purchases on credit take place
at prices that compensate for the expected loss of purchasing power during
the credit period, even if the period is short.
- Interest rates, wages, and prices are
linked to a price index.
Now, considering the five indicators together, is Malawi a hyperinflationary economy?
