Monthly Inflation Still in 5-10 Percent Band

UNCLAS HARARE 002058

SIPDIS

STATE FOR AF/S
USDOC FOR ROBERT TELCHIN
TREASURY FOR OREN WYCHE-SHAW
PASS USTR FLORIZELLE LISER
STATE PASS USAID FOR MARJORIE COPSON

SENSITIVE


E. O. 12958: N/A
TAGS: EFIN ECON ETRD EINV PGOV ZI
SUBJECT: Monthly Inflation Still in 5-10 Percent Band



1. Summary: Despite claims in the Dec 14 Herald that
inflation is "on a downward spiral," the rate has held
within an approximate 5-10 percent monthly band since the
Reserve Bank (RBZ) reasserted control over the exchange
rate in January. End summary.


2. While the annual inflation rate has fallen from 623 to
149 percent since January, this is more a consequence of
Central Statistical Office (CSO) methodology. The CSO
calculates annual inflation by compounding the sum of the
past 12 months' inflation, rather than by annualizing the
current month. Monthly CPI increases since February
range from 4.8 to 10.1 percent:

Feb 2004 6.0
Mar 5.9
Apr 4.8
May 6.0
Jun 9.2
Jul 9.5
Aug 5.3
Sep 5.9
Oct 10.1
Nov 7.8

Relying almost exclusively on an enforced exchange rate,
the Reserve Bank (RBZ) has - with one exception since
February - held monthly inflation in single digits. By
contrast, it peaked at 33.6 percent in November 2003, but
fell rapidly after the RBZ introduced its controlled
currency auctions in January.


3. However, current monthly rates in the 5-10 percent
range will no longer supplant double-digit rates from
previous-year months, making it far more difficult for
the annual inflation rate - as the GOZ measures it - to
continue to fall. A 5-percent rate for Sept 2005 might
replace a 6-percent rate for Sept 2006, rather than Sept
2003's 25-percent rate. Crunch-time will begin in mid-
March, when the CSO releases cumulative inflation for the
March 2003-Feb 2004 period. Meanwhile, other factors
seem to portend higher inflation: a) the RBZ will come
under increasing pressure to permit a devaluation of the
zimdollar, and b) the local fuel price will surely have
to rise beyond the current Z$4,000 (US$.44 at parallel
rates)/liter, the region's lowest tariff.

Dell