Batanai Matsika 
AN important aspect in forecasting inflation trends is assessing the impact of temporary price shocks.
The expectations-augmented Phillips curve shows that inflation depends on inflation expectations, the gap between output and its natural level (output gap) and temporary price shocks. While inflation expectations and the output gap may be key drivers of inflation, they do not capture all the factors that influence inflation at any time.
A supply shock like a temporary increase in the price of imported oil can drive up inflation for a while. An analysis of crude oil price trends over the past year indicates that average crude oil spot prices have increased from around US$30/bbl to US$60/bbl in February 2021.
There has been a lot of price volatility associated with crude oil. More recently, the American Petroleum Institute (API) reported a build in crude oil inventories of 2.927 million barrels for the week ending 19 March 2021. Analysts had predicted a much smaller inventory build of 272 000 barrels for the week. As a result, West Texas Intermediate (WTI) crude oil fell to US$57,48/bbl as new EU lockdowns threaten to further dampen oil demand and as speculators look to liquidate their long positions.
The Brent crude benchmark also fell to US$60,49/bbl (about US$8 per barrel down on the week).
Generally, there is widespread concern that large fluctuations in the real price of oil are harmful to the economies of oil importers such as Zimbabwe. An exogenous increase in the real price of imported crude oil from the point of view of an oil-importing economy is a terms-of-trade shock. Such terms-of-trade shocks traditionally have been thought to matter for the oil-importing economy through their effects on production decisions. In this view, oil is treated as an intermediate input in domestic production. That said, oil price changes may also negatively impact consumer expenditures in four ways;
• Firstly, higher energy prices reduce discretionary income as consumers have less money to spend after paying their energy bills;
• Secondly, changing oil prices may create uncertainty about the future path of energy prices, causing consumers to postpone irreversible purchases of consumer durables. This uncertainty effect is limited to irreversible purchases. It is usually thought to apply to consumer durables, especially energy-using consumer durables;
• Thirdly, even when purchase decisions are reversible, consumption may fall in response to energy price shocks as consumers increase their precautionary savings. This response may arise if consumers smooth their consumption because they perceive a greater likelihood of future unemployment and hence future income losses; and
• Finally, consumption of durables that are complementary in use with energy (in that their operation requires energy) will tend to decline even more, as households delay or forego purchases of energy-using durables. This is most pronounced for motor vehicles.
Overall, the points highlighted above all imply a reduction in aggregate demand in response to unanticipated energy price increases. In addition, there may also be indirect effects related to the changing patterns of consumption and investment expenditures. Looking at the Zimbabwean context, fuel price increases are likely to continue (both in US$ and in ZWL$).
This will likely increase pressure on transport costs and drive price increases of goods and services, putting further pressure on staple foods.
Our research on household incomes in Zimbabwe points to the fact that a significant portion is being directed towards essentials such a food and rentals (60 percent), debt repayments (mostly micro-finance debt) take up to 20 percent while transport costs take 15 percent.
There are also strong signs that savings are minimal or non-existent given the low disposable incomes.
The continued rise in the cost of living in Zimbabwe has come against low wages and salaries especially at a time companies continue to battle from Covid-19 scars.
Morgan & Co Research contends that a major risk that could play out in Zimbabwe is limited demand because of a deterioration in household incomes. In line with our prognosis, companies that focus on luxury or non-essential goods will be the victims in 2021.
Tourism and hospitality will likely remain in the doldrums while consumer-facing companies offering defensive and mass-market oriented goods could be able to surf the tide. This has also been reflected by the solid set of financial results from names such as Innscor Africa and National Foods. That said, investors on our market should seek exposure in companies that have defensive business models, cash-generative and export-oriented. Value scavengers should by buying into Innscor Africa, Simbisa Brands, National Foods and SeedCo International.
●Batanai Matsika is the Head of Research at Morgan & Co, and Founder of piggybankadvisor.com. He can be reached on +263 78 358 4745 or batanai@morganzim.com / batanai@piggybankadvisor.com
