Blended Inflation and Consumer Price Index (CPI)
Inflation is one of most important economic variables for business, individuals and even countries. It is important to understand the inflation levels in the country you live in for one to make better economic and business decisions. The levels of inflation determine the living standards of the majority and they are many factors that can influence the inflation rates in different countries.
Background
The Consumer Price Index (CPI) is used by the Zimbabwe National Statistics Agency (ZIMSTAT) to measure inflation. The index acquires its data from an investigation of diverse segments in the economy. It records the prices of several consumer items each month. The Zimbabwe statistical office announced in August 2020 that commencing from June 2020 they were now publishing blended inflation and Consumer Price Index (CPI). This entails the blending of the inflation for prices that are quoted in US dollars (US$) and inflation for prices quoted in ZWL. This follows the promulgation of Statutory Instrument 185 of 2020 which allowed entities to quote and sell goods and services in both US$ and ZWL. [1]
History
Zimbabwe has had a horrific inflation history with the hyperinflation era of 2000 — 2008 followed by a stabilised dollarised period in 2009 to 2013 during the Government of National Unity. The introduction of the Bond Notes and ZWL currency saw the inflation figures rise again due to the parallel market activities. However in the year 2020, the introduction of the Foreign Exchange Auction System brought stability to the Foreign Exchange Trading market and a down trend in the inflation rate emerged from August 2020. None the less, the beginning of the year 2021 has seen the trend moving slightly in an upward direction. According to the Reserve Bank of Zimbabwe (RBZ), Zimbabwe’s annual consumer price inflation rose to 362,3 percent in January 2021 from 348,59 percent in the previous month, breaking a run of five consecutive months of slowdown. On a monthly basis, consumer prices inched up 5,43 percent, the biggest increase in five months. The increase may however be attributed to the reduced supply of goods due to lock down measures during the Coronavirus pandemic.
In economics, inflation is a general rise in the price level in an economy over a period of time. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation reflects a reduction in the purchasing power per unit of money — a loss of real value in the medium of exchange and unit of account within the economy.
Effects and Challenges of the inflation dynamics
An inflation dynamic that occurred during the year 2020 was the introduction of the blended inflation rate. Statutory Instrument 185 of 2020 permitted companies to charge for their goods and services in US$ and ZWL. According to the Institute of Chartered Accountants of Zimbabwe, entities that see an increase in US$ transactions over ZWL transactions will need to do an assessment of whether their Functional Currency has changed from ZWL to US$ in accordance with International Accounting Standard (“IAS”) 21 which deals with the effects of changes in foreign exchange rates. Selection and use of the general price index in the restatement of financial statements in accordance with IAS 29 requires the use of a general price index that reflects changes in general purchasing power. In Zimbabwe, the currency which was assessed to be in hyperinflation is the ZWL. “Entities that still use the ZWL as the functional currency should continue to use the ZWL CPI and not a blended CPI in the preparation of Inflation adjusted financials,” stated the institute in a press release.
The institute advised that, “a blended inflation index is not appropriate in the preparation of inflation adjusted financial statements as the financials are prepared in a particular functional currency (either ZWL or USD) and not reported in a blended currency. Similarly, any inflation index should also be specific to the reporting currency. Therefore, those entities whose functional currency is ZWL should continue preparing hyperinflation accounts.”
