Cablegate: Zimbabwe's Elusive Inflation Rate

This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS HARARE 002308

SIPDIS

STATE FOR AF/S
NSC FOR SENIOR AFRICA DIRECTOR JFRAZER
USDOC FOR 2037 DIEMOND
PASS USTR ROSA WHITAKER
TREASURY FOR ED BARBER AND CWILKENSON
USAID FOR MAJORIE COPSON

E.O. 12958: N/A
TAGS: EFIN ECON ZI
SUBJECT: Zimbabwe's Elusive Inflation Rate

1. Summary: Evidence suggests the GoZ understates the
country's inflation, as the Central Statistical Office (CSO)
relies on an outdated Consumer Price Index (CPI) and
disregards product availability. However, data are
unavailable to determine how far inflation runs beyond the
official rate, currently 140 percent. End Summary.

2. We recently hashed over inflation data with officials at
CSO, the rough equivalent of the U.S. Bureau of Labor
Statistics and sole GoZ organ that gathers monthly CPI data.
We are not aware of an independent body, other than our
USAID mission (more below), that tracks price changes.

Methodology Flaws
-----------------
3. CSO's indexing process has two glaring shortcomings.
First, it has not adjusted CPI weights in the basket of
goods and services since 1995, when Zimbabwe enjoyed a more
robust economy. The present CPI assumes that food accounts
for just 33.6 percent of household purchases, although
Zimbabwean families now spend the bulk of their income on
diet. Furthermore, at a time when half the country's
population is threatened by famine, the CPI seems to
overemphasize clothing and footwear (6.9 percent), furniture
(7.5 percent) and entertainment (1.2 percent).

4. Second, CSO data do not reflect black-market food cost.
Surveyors visit shops that list only official prices. They
do not check for product availability, a common problem in
today's Zimbabwe, so there is no mechanism for determining
repressed inflation or product substitution.

5. Given that a) food should now dominate the CPI and b) its
yearly increase is certainly higher than the reported 125.5
percent, we unscientifically conclude that overall inflation
exceeds 140 percent. As peripheral evidence, we note that
annual monetary expansion is running at 102 percent and the
Zimdollar has lost 70 percent in parallel markets since
October 2001.

So How High is Inflation?
-------------------------
6. The USAID Mission economist has developed an intriguing
"back of the envelope" model that elevates CPI weights for
food, housing and transport/communications (though without a
household survey). USAID staffers collect data, taking into
account official as well as black-market prices for goods
and services. Findings through September 2002 indicate an
annual inflation rate of 316 percent using controlled prices
and 422 percent using parallel market prices. We consider
the USAID model a useful counterpoint to the official CPI,
but feel the products and services included (e.g., "Ortho
King" bed, lounge suite, international phone call, etc.) may
be import-heavy and skewed toward middle-class buying
patterns.

Comment
-------
7. When pressed, CSO statisticians acknowledged the
shortcomings of their CPI process, but argued they may also
be exaggerating inflation in some areas by overweighing CPI
groups dominated by imports (such as electronics). This is
no doubt true. However, if you elevate food's share of the
CPI from 33.6 to, say, 60-80 percent and use international
norms to determine price fluctuation, your net effect will
still be far steeper than reported inflation. Thus while
the oft-cited official inflation rate is conservative, we
are unable to calculate how much higher it should be.
Zimbabweans, of course, do not need an accurate CPI to tell
them their standard of living is disintegrating. (Per
capita GDP will have fallen from US$ 736 in 1997 to US$ 273
by the end of the year.)

Sullivan

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