Households bear brunt of rising cost of living

In recent months, inflation has been steadily easing, but without any meaningful drop, if any, in commodity prices, Prosper Magazine can reveal.    
As a result, the country’s economic managers at the Finance ministry are calling for patience, implying that households will have to continue enduring the high cost of living even as inflation figures move from double to single digit.
But the high cost of living is biting Ugandans harder considering that their incomes have remained stagnant, offering no remedy to cope with the rising living costs. 

According to the Uganda Bureau of Statistics, as of end of December 2022, the country’s annual inflation rate, rose to 10.2 percent in 2022 from 6.8 percent in June 2022, far beyond the 5 per cent cap which is a ceiling the economic managers at Bank of Uganda and Finance ministry would like to maintain it at. 

As inflation hit through the roof, thanks to the disruption of Covid-19 effects on supply chains coupled with the emergence of Russian-Ukraine war, so were the commodity prices, including food and (fuel) pump prices which have never gone back to the pre-Covid-19 levels of below Shs4,000 even in the face of current easing inflation.     

 
Inflation drops as prices rise 
March 2023 data from Uganda Bureau of Statistics shows that annual headline inflation - a measure of the cost of living - dropped to 9 percent, in March 2023 from 9.2  percent in February 2023.   

“Inflation is now going down. We expect 6 per cent growth,” said the Bank of Uganda deputy Governor Michael Atingi-Ego.  But the deputy central bank governor noted that despite the encouraging inflation figure and its impact on projected economic growth, households, a key economic building block, with nearly 70 per cent of whom are detached from the money economy, are not ‘smelling the coffee.’

According to Mr Atingi-Ego, majority of households are not benefiting from the changes in inflation figures, admitting that the current 7.6 percent core inflation tangibly translates “very differently for households.”

Global oil dynamics 
He said: “It is impacting the cost of living through the erosion of purchasing power of incomes. The higher the inflation, the lower the purchasing power of the income that you have. As the central bank, we are very interested in preserving purchasing power of the income of our people and that can be achieved by bringing down inflation.” 

He continued: “The conditions, however, are still unfavourable because of the elevated inflation as compared to where we want to be, but the actions we are taking now are meant to bring inflation down to 5 percent. But this is not being helped by OPEC who are cutting their fuel supply to get more while for us, this causes high fuel prices and many other effects.”

Once the OPEC countries cuts production of oil, the central bank deputy governor, believes there will be no doubt, “we will see higher oil prices, translating into higher domestic prices, resulting into inflation that might actually turn out to be higher than we are currently projecting.”

Talking research 
In his analysis, titled: Why Ugandans should brace for higher commodity prices in 2023, the Economic Policy Research Centre (EPRC) research fellow, Dr Brian Sserunjogi, indicated that the price of several commodities and services will continue to increase tremendously because for the most part, the cause is way beyond government’s regulatory control. 

He notes that despite the anticipated domestic price increases, global commodity prices are projected to ease in 2023, buoyed by a slowdown in global growth. 

In his expert analysis, Dr Sserunjogi argued that earlier projections by the Bank of Uganda showing that energy prices are expected to fall by 11 percent this year (2023) as well as agricultural, and metal prices expected to decline by 5 and 15 percent in 2023 will not be achieved because of lack substantial short-term policy interventions to increase investment in affordable irrigation facilities for farming households.

For that, slight drought or prolonged water shortages for agricultural production will push up commodity prices, not to mention the continued escalation of the Ukraine-Russia war, increasing the price of agricultural commodities such as wheat and sunflower as well as those of raw materials, namely, fertilisers, fuel, and other industrial commodities, that are directly imported from both countries. 

In addition, like in 2022, further escalation of the war is likely to indirectly impact other agricultural commodities, such as palm oil production in exporting countries such as Indonesia and Malaysia, because of high fertiliser prices resulting in shortages and hence higher prices.
Finally, he wrote: “A persistent elevation of global fuel prices in 2023 will probably be transmitted directly into the final consumer price.” 

According to the World Bank, global energy prices fell by 6.2 percent in the last half of 2022 and are further anticipated to decline by 11 percent in 2023. However, with China easing domestic COVID-19 restrictions in January 2023, demand for fuel is likely to increase and exert further pressure on the final fuel price. In addition, with OPEC issuing production quarters to its member countries, it is anticipated that oil prices shall average US dollar 85 per barrel.

“If this projection materialises, energy prices will still be 75 percent above their average over the past five years. The anticipated high energy prices in 2023 are likely to be translated to high commodity prices domestically, emanating from high transport costs,” Dr Sserunjogi argued in his analysis. 

Plight of households  
In an interview last week, Dr Sserunjogi told Prosper Magazine, the ultimate brunt in changes in inflation movement will be borne by the household by escalating poverty. 
“With high commodity prices, food becomes expensive as it consumes the biggest household income, and with less income, welfare is affected. Before you know it, you would have slid into poverty,” he said, adding, there will also be less investment as import of raw materials and related inputs becomes expensive for manufacturers.”   
 
In another interview with senior economist Fred Muhumuza, the changing inflation figures, although downward, is still costly to the household. This is because this nature of inflation speaks to the speed at which prices are changing and not the level of changes. 

This, he said also discloses the fact that commodity prices have not gone to its pre-Covid-19 or of if you like original prices
“So, the prices we have now are going to be the new prices,” said Dr Muhumuza, also Makerere School University School of Economics lecturer. 

He continued: “Households need to get used to the new prices. This means tightening your belt and considering the new prices as the new normal.”

To address this issue, household incomes and salaries for the employed will have to be increased. Short of that, you will buy less than you would normally do. This is already happening beyond prices of commodities. Most households are already feeling the pinch of increased school fees. All that rising cost of living is happening without any drastic change or if you like minimal change in peoples’ livelihoods --- which according to some economic analysts are “worse off compared to where we were before the inflation reared its ugly head.”

Economic manager 
As for government, patience coupled with resilience of the economy will see the country negotiate this slippery ground. When that comes to pass, the economy may never go back to its original standing, but emerge stronger than before.  

“Technically speaking, inflation is still there, and that is expected. But we will find a new equilibrium and stability although it may not be the same because prices could be slightly at a level higher than the pre-Covid-19 equilibrium,” Deputy Secretary to the Treasury, Mr Patrick Ocailap told Prosper Magazine last week. 
He continued: “Unless something fundamental and structural happens in the world economy, you can’t expect prices to come down overnight. They will come down gradually.”

He was also optimistic that with bumper harvest and production of food, “definitely prices of commodities will come down by end of this year and stabilise by next year. But generally, households should be cautious and adjust accordingly.”

Mr Ocailap ended by saying that funds that are being saved through cutting expenditure and financial frugality will be used to support households at a lower level through Parish Development Model (PDM).

Impact of budget cuts
With increased pressure on resources (revenues), a revised budget call circular was issued by the Finance Ministry Secretary to the Treasury, Mr Ramathan Ggoobi, directing a freeze in acquisition of new loans beginning next financial year, barely two months away. 

With less than desired revenue collection, some of the victims of the budget cuts technically known as fiscal consolidation include key sectors of the economy such as agriculture, education and health, not to mention the Small and Medium Enterprises (SMEs) specifically those involved in advertising, stationeries, printing, branding and travels among others. 

Asked about the side effects of the fiscal consolidation, Mr Ocailap said: “They will have to adjust to the realities until the equilibrium stabilises.” 

He projected that revenue deficit by close of the financial year would have picked to close to Shs3 trillion, which is about three times Uganda Development Bank recapitalisation for three years. 

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