SIKAKROM with Gideon DONKOR: Inflation, dollar appreciation, prices and lived experience

Recently, the government statistician announced that inflation for November 2025 had fallen sharply to 6.3%, compared to 23% in the previous year. Many observers see this as a significant achievement. Meanwhile, lively media discussions continue about what this milestone means, especially since we have experienced four consecutive years of high inflation. It is common for people to ask, “if inflation has dropped why are prices still high?”. Others also notice that even though the cedi has appreciated by 35% against the dollar, prices have not decreased—in fact, they have generally gone up. I will try to shed light on these issues, hoping to clarify without adding any further confusion.

Inflation is defined as a persistent increase in general price levels over a specified period. It represents the loss of purchasing power of the cedi, as seen in rising prices for goods and services over time. Statisticians calculate the inflation rate by surveying the prices of a selected basket of goods across various markets and determining an average, which they then compare to figures from the previous year and month. Inflation indicates increasing prices and stands in contrast to deflation, where prices decline and purchasing power improves. Importantly, inflation never signifies falling prices.

For instance, if the inflation rate for this year is 6.3% whereas it was 23% last year, an item that cost GH¢100 in November 2023 would be priced at GH¢123 in November 2024. Had the previous inflation rate persisted, the price could have increased to GH¢151.29; however, owing to the decrease in inflation, the current price is GH¢130.75. Depending on your perspective, you might or might not notice this change in daily life—if you thought goods were expensive last year, they’re probably even pricier now unless your income has risen a lot. As with most economic data, it is generally inadvisable to draw broad conclusions from a single figure. To accurately evaluate changes in affordability, it is necessary to examine wages and employment trends within the same time frame. This approach provides a comprehensive perspective on fluctuations in the cost of living. For those calling for across the board price reductions, deflation is an economic nightmare, especially when you have large debts.

Let us move on to the more engaging discussion. Some analysts have questioned why prices have not decreased despite the cedi’s appreciation. They point fingers at GUTA members who previously blamed rising prices on cedi depreciation but now appear to have changed their stance. The conclusion drawn is that traders are “greedy” and aren’t passing on the currency gains, especially since “we import everything.” Some even advocate Price Controls, as if it ever worked in the 1960s and 1970s! But do we truly import everything?

At year-end 2024, Ghana’s GDP stood at GH¢1.1 trillion (US$76.9 billion), while the import bill was US$15.24 billion. The calculation for GDP follows the formula: Consumption Investment Government expenditure (Exports – Imports). Imports are not included when calculating GDP, and the fact that our GDP is still positive humorously suggests that we do not import everything! In seriousness, this is an accounting method where imports are initially counted within consumption, investment, and government spending, but are later subtracted to avoid double-counting foreign output. While imported goods do not contribute to GDP themselves, the domestic services connected to these imports—such as retail and transportation—do add value. I think some people underestimate the significant value-added economic activity that occurs domestically. The largest sector of the economy is Services, accounting for 50% of GDP—these activities are predominantly based within Ghana. Agriculture is the next major sector; although most inputs are imported, locally sourced production costs—including land and labor—are significant. Collectively, the Services and Agriculture sectors contribute about 70% of our economy and its largely domesticated. This loosely implies that local production costs are likely to have a greater impact on final prices than import costs. Using imports to GDP ratio to measure our openness to trade for 2024, we are at 19.8% compared to say South Africa at 29.85% and Singapore at 83.5%. Fun fact: Singapore imports 90% of their food supply.

Imported products can be positioned on a continuum based on the extent of local value addition. At one extreme are pure consumed imports, which involve minimal local processing or transformation. For instance, direct purchases abroad, such as shopping in London or buying a vehicle, should reflect the full impact of currency appreciation benefits. As local value addition increases along this continuum, elements such as production costs, utilities, and the inefficiencies within local logistics begin to offset gains from currency movements. In Ghana, particularly, utility expenses and product losses due to inefficient logistics remain significant cost factors. For instance, I read that tomato marketers may lose up to a third of their produce in transit. If this information is accurate, it would be necessary to increase the farmgate price by at least 50% just to account for these losses.  A positive inflation rate despite strong currency appreciation suggests the CPI basket includes goods and services with high local value added. Even products like fuel, which are imported and priced in foreign currencies, incur considerable local costs associated with logistics, distribution, and taxation, thus diminishing the net gains realized from currency strength.

To be fair to those who argue that prices should drop, there are other noteworthy factors involved beyond just the proportion of local value added to products. For example, price stickiness—the tendency for market prices to remain steady or decrease slowly even when input costs change—also plays a role. In such instances, importers may keep some of the currency gains, although not as much as people often assume.

A notable phenomenon is currently observed in the grains and eggs market. Although there seems to be an abundance of food, suppliers are not reducing their prices to sell perishable goods more easily. There is no obvious evidence of overproduction—if overproduction was happening, we would expect to see increased productivity and reduced average costs, which should, in turn, lead to higher profits even at lower prices. Instead, a 35% rise in the value of the local currency has made products from neighboring countries more attractive, resulting in domestic produce being undercut. Local production already struggles with high costs that go beyond the expense of imported inputs. Consequently, local producers are experiencing diminished export opportunities in neighboring markets, attributable to their comparatively higher prices and, in certain instances, to export bans that have not adapted to current market conditions. This raises the question: why do suppliers refrain from reducing prices to mitigate almost certain losses?

This behavior may be explained by the disposition effect—a behavioral finance bias wherein investors tend to sell assets that have appreciated while retaining those that have declined in value. Evidence of this bias has been identified in grain marketing.

For example, a five-year study by Mattos (2012), which analyzed the pricing strategies of over 15,000 wheat producers, revealed strong indications of the disposition effect influencing their marketing decisions. Producers tended to delay selling when market prices fell below their reference point, and did the opposite when prices were favorable. In the context of our local industry, producers’ reference points are likely shaped by input purchases made prior to the currency’s appreciation and the resulting high levels of debt or capital that must be recouped. Consequently, they exhibit a tendency to hold onto inventory in anticipation of price recovery, rather than sell at a loss—a decision that carries additional risk should the goods ultimately spoil.

There has been advocacy for the government to address this issue through direct purchases; however, the allocated funds appear insufficient relative to the magnitude of the problem. I recommend that, rather than having the government buy products directly from these farmers, each farmer should receive a subsidy equal to 35% of their reference prices. This approach would help restore regular trade flows across borders and could potentially increase the impact of allocated funds threefold. While this may present administrative challenges, it is likely to be more cost-effective than direct government procurement, which may lead to greater losses.

It seems that, as a country, we focus too much on linking price increases to currency fluctuations, rather than considering how our monetary policies and other factors play a role. I notice a stronger connection between increased money supply and rising prices, which then leads to the cedi losing value against major currencies. Last year, for example, average inflation was 23%, the average USD/GHS exchange rate depreciated by about 27% year-on-year, and the money supply grew by 33.7%, even though our foreign reserves increased due to positive net inflows. So, is the exchange rate driving inflation, or is it the other way around to maintain the real exchange rate? Did the effect cause the cause or as they say is the dog wagging the tail or the other way round? Personally, I believe that price increases are mainly driven by expanded money supply, and the cedi must depreciate to realign its value with the dollar. That’s just my view, but what do I know?

Gideon Donkor, an avid reader, dog lover, foodie, closet sports genius but a non-financial expert

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