Addressing the recent sharp rise in inflation has become a central macroeconomic policy concern in Tanzania, as it has across East Africa. The macroeconomic environment has become particularly volatile since the recent financial crisis. Growth in Tanzania has fluctuated and year-on-year headline inflation edged above 10 percent in mid-2008.
This study develops an empirical model of inflation in Tanzania for the decade from 2001, estimating ‘multiple determinant’ single-equation models for month-on-month headline inflation and its principal components (food, energy and core inflation). This is to determine how much of the current surge in inflation really is due to these external factors and how much is actually a reflection of domestic factors including a fiscal and monetary stance that is too loose given aggregate supply.
The results suggest that while supply-side factors, including yield variability and international price arbitrage pressures, play a major role in determining domestic food and fuel inflation (which together account for almost 60 percent of the total CPI basket), demand-side factors amenable to policy intervention by the monetary authorities anchor core inflation. The models are constructed around high frequency and timely data allowing this work to support the development of an inflation-forecasting capability by the Bank of Tanzania. The paper by Christopher S. Adam (Oxford University), David Kwimbere (Bank of Tanzania), Wilfred Mbowe (Bank of Tanzania) and Stephen O’Connell (Swarthmore College) concludes by discussing a number of concerns about data quality and identifying areas for further research required to achieve this objective.