The Bank of Ghana has expressed optimism that both Food and Non-Food prices will remain low in the coming months as the economy recovers. The low price expectations, according to the BoG, is as a result of the prevailing spare capacity, low production costs as well as the projected stability of the exchange rate in the outlook.

“In the baseline forecast, food and non-food inflation are projected to hover around the central path, driven broadly by low production costs”.
Bank of Ghana

However, BoG warns of a possible rise in the price of imported goods in the coming months due to price developments in the international market. This is because global inflation continues to surge in most advanced economies. The driving factors are elevated crude oil prices, base drift effects and temporary supply-demand imbalances.

As a result, Inflation expectations across the globe is expected to exert pressure on domestic inflation through the imported price channel in the near-term.

Production costs to rise as economic activity fully recover

The Bank of Ghana however, warns that production costs will rise in the medium-term as economic activity fully recovers. The BoG anticipates Economic activity to approach full capacity in the medium-term.

The Central Bank noted that this will be driven by higher impulses from global demand and improvement in expectations of economic agents as the economy better adapts to the COVID-19 pandemic.

Nevertheless, in its recent outlook, the Central Bank expects overall inflation to remain below the central path in the medium-term, barring any unforeseen shocks. This reflects favorable base-drift effects due to the waning impact of COVID-induced spike in food prices which occurred in the second quarter of 2020.

Another important contributor to the Central Bank’s low inflationary expectations is the impact of the tight monetary policy stance in the outlook.

Despite the positive inflation outlook, the BoG cautions that key upside risks persist. Potential risk factors to the outlook include the projected uptick in food prices, rising ex-pump prices of petroleum products and possible fiscal pressures.

Domestic food price pressures

The Bank of Ghana further indicated that despite the sharp decline in food inflation in recent months, pressures on food prices are emerging.

Moreover, the recent outbreak of bird flu disease which has restricted the movements of poultry and poultry products within and from affected regions could drive up the prices of poultry products.

Also, changes in the weather pattern could significantly lower food production and put upward pressures on food prices in the outlook.

Rising Ex-Pump Prices

Furthermore, the BoG noted that rising international crude oil prices and its attendant upward adjustment in ex-pump prices would exert some inflationary pressures in the outlook.

According to the BoG, the recent upward adjustment of transport fares is likely to lead to second-round pricing effects on most items in the CPI basket. This is because transport costs form part of the price components of most products.

However, the Central Bank argues that if crude oil prices stabilize at its current levels, the impact of ex-pump prices on headline inflation in the outlook would be muted. This is mainly due to the fact that the direct impact of the current crude oil price has already reflected in the CPI.

Meanwhile, a possible rise in Imported inflation, fiscal pressures as well as the pace of rebound of Domestic economic activity are other risk factors to the inflationary outlook.