The inflation rate in Ghana, as measured by the consumer price index, ended at 7.9% in 2019. In a recent research study in the west African nation, prices are expected to continue their rise throughout 2020 at a predicted rate of 8.8% by the end of the year. This is bad news for Ghanaian consumers who are already feeling the squeeze as their hard-earned cash continues to lose purchasing power.
Ghana has been plagued by high inflation since mid 2013, when the general price level began a rapid increase reaching a high of 19% in early 2016. Whilst the inflation rate has been declining in the last 3 years, Ghanaian policy makers will be worried as they see the inflation rate beginning to creep upwards once again.
Inflation in Ghana is a classic example of strong levels of aggregate demand (AD) putting unsustainable pressure on prices, resulting in what we call demand-pull inflation. Since 2016, when inflation began soaring, Ghana has recorded an average of 6% GDP growth per year. With GDP and AD amounting to the same value in an economy, we can attribute the rising prices to the strong growth in AD. One of the main reasons for this is the staunch commitment from the Ghanaian government to high levels of government spending. With more huge infrastructure projects planned for 2020, this trend has no signs of abating!
Q1. What is meant by the term demand-pull inflation?
Q2. Explain why the high levels of government spending in Ghana could result in demand-pull inflation.
Q3. Assess an economic policy which the Ghanaian government could pursue to try and reduce the level of inflation.
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