The annual inflation rate in Uganda, as measured by the Consumer Price Index, for the 12 months to August 2023 has been registered at 3.5% compared to 3.9% in July 2023, according to the latest data from the Uganda Bureau of Statistics.
The slowdown in inflation in August was attributed to the Annual Core Inflation, which slowed down to 3.3% in August 2023, compared to July 2023. The Inflation drop was further attributed to other goods, services, Rice, and maize flour whose annual inflation that dropped.
In addition, Annual Energy, Fuel, and Utilities Inflation also slowed to -2.7% from the -1.6% recorded in July 2023. A fall in inflation boosts effective demand since people can afford to purchase goods, and this in turn supports economic growth.
On average, there has been a reduction in inflation since October 2022, when it was at 10.7%. It gradually reduced to 10.6% (November), and 10.2% (December), and slightly picked up in January at 10.4% before reducing to 9.0% in March. In April inflation was further reduced to 8%, and currently stands at around 3.5%.
Ideally, reduced inflation should imply that there’s a stable investment environment as it reduces uncertainty and inflationary expectations. Investors are more likely to make long-term investment decisions when they can confidently predict future costs and returns.
This stability encourages both domestic and foreign investment, leading to economic development.
Ideally, a drop-in inflation allows disposable income which enhances aggregate demand, the driver of economic activity, increased consumer confidence, and lower interest on loans among others. However, a key concern is the fact that inflation has been going down yet the cost of living continues to be high. Several factors explain this issue;
Supply and Demand Dynamics: Inflation is influenced by various factors, including supply and demand dynamics. While inflation may be dropping overall, specific sectors or goods may be experiencing higher demand or facing supply constraints, leading to increased prices. This can affect the cost of living for specific services, even if inflation, in general, is declining.
Imported Inflation: Uganda relies on imports for many goods and services. Changes in exchange rates, global commodity prices, or trade policies can influence the cost of imported goods, which may not be fully reflected in overall inflation figures. Thus, the cost of living for imported items can remain high even if inflation is decreasing domestically.
Wage Growth: The cost of living can also be influenced by wage growth. If wages are not keeping pace with inflation or are growing at a slower rate, it can result in a higher cost of living for individuals and households.