Africa’s largest MICs and their inflation quandary
Average prices have increased by approximately 30 percent over the past 12 months in Egypt, Nigeria, and South Africa. This is concerning because inflation usually happens gradually. But, inflation in these three countries has been far from gradual.
When Egyptian consumers continued buying poultry at higher prices, despite doubling or tripling in cost, demand pull inflation kicked in, exasperating the problem. (Nour Elgitani/Farmers Weekly)
So, what explains this progressive rise in prices in Africa’s top three middle income countries? What are the commonalities? Let me explain. Inflation in Africa’s three largest MICs is basically being triggered by two primary types of inflation: demand pull inflation, and cost push inflation.
Demand pull inflation occurs when demand for goods and services leads to increased prices. If something essential is in short supply, consumers often have to pay more for it. But, supply shortages weren’t the initial trigger for rising prices neither in Egypt, Nigeria, or South Africa.
Inflation was triggered by the severe devaluation of the currencies of these three nations that occurred in 2022. These currency devaluations made the cost of imports rise by close to 80 percent. This in turn triggered severe food inflation, rising gas prices, and a general price increase for all types of imports.
Devaluation also increased the cost of imported raw materials, and intermediate inputs for domestic manufacturing. When domestic manufacturers found themselves having to pay more to produce and supply goods, these price hikes were in large part carried over to consumers. This is cost push inflation.
For example, when the price of poultry in Egypt kept rising from suppliers, eventually supermarkets needed to charge more for chicken and eggs. But, when supermarkets in Egypt raised the price of chicken and eggs, because suppliers raised their prices, consumers remained compelled to buy poultry. When consumers continued to buy poultry at elevated prices, even though when in some cases it had doubled or tripled in cost, demand pull inflation kicked in, exasperating the problem.
Answering the question of what triggered rampant inflation in Africa’s three largest MICs, is kind of trying to answer the question of what came first, the chicken or the egg. Yes, cost push inflation came first with the causality being serious currency devaluation. Demand pull inflation came second, with the causality being cost push inflation. But, the primary culprit behind rampant inflation was the severe devaluation of the naira, the rand, and the pound. If cost push inflation was the chicken, and the egg was demand pull inflation, it was an out of control rooster called devaluation that started it all.
