Ghana's headline inflation climbs to 9.7% in August

Ghana's headline inflation has been on a steady rise, hitting 9.7% in August, marking the fourth consecutive increase. Food inflation, the largest contributor, rose for a third straight month, contributing to the upward trend. Courage Martey, a Senior Economist at Databank Group, provided insights into the key drivers behind this concerning trend. Martey emphasized that the surge in inflation is mainly attributed to cost-push factors rather than demand factors. This distinction is crucial as demand-driven inflation can typically be managed through monetary policy adjustments, such as interest rate changes. However, the current inflationary pressures stemming from food inflation are influenced by structural factors and the depreciation of the local currency. Martey highlighted that the rise in food inflation is largely driven by increased costs of imported items due to higher container charges at the ports. Additionally, disruptions in the supply chain have led to heightened raw material costs, further driving up prices of food items. These cost and structural factors present challenges that may take time to normalize, posing a risk of inflation overshooting the upper limit set by the central bank. The situation is exacerbated by rising global oil prices, which have led to increased utility costs and transport fees in Ghana. This trend underscores the interconnectedness of various economic indicators and the complex challenges facing policymakers as they navigate the inflationary environment. Looking ahead, Martey noted that the Bank of Ghana is likely to maintain its policy rate at 13.5% to support the economy's fragile recovery. While there is a possibility of moderate overshooting of the inflation target, policymakers are expected to tread cautiously to avoid exacerbating the situation. In the event of a significant deviation from the target band, Martey suggested that the central bank could deploy administrative tools such as adjusting capital conservation buffers and primary reserve ratios to address the inflationary pressures. Moreover, Martey highlighted the importance of coordination between monetary and fiscal authorities to effectively manage inflation. He emphasized that fiscal risks, including a substantial financing gap, pose a significant threat to inflation dynamics. To mitigate these risks, fiscal authorities need to enhance fiscal consolidation efforts to create room for monetary policy adjustments if necessary. The upcoming meeting of the National Policy Committee (NPC) is expected to address these challenges and outline strategies to rein in inflation and support sustainable economic growth.