Last week Steve Hanke, a professor of economics at Johns Hopkins University in the US, released a tweet claiming that Zambian authorities were underreporting the country’s inflation rate. According to Hanke, Zambia’s inflation rate was 48% rather than the 13% reported by the Zambia Statistics Agency (Zamstats), the official entity that calculates the nation’s inflation rate. In other words, Hanke is claiming that Zamstats were manipulating the nation’s inflation rate and reporting it to be 4 times lower than it actually is! A serious allegation.
Naturally, Hanke’s missive has caused quite a consternation in Zambia given the country’s fraught political landscape. Critics of the government are citing Hanke as credible evidence that the government’s economic recovery plan is in disarray with the government hiding the true extent of the damage. After all Hanke is not a random person off the street but a professor of economics at a prestigious university in the US.
So who should we believe between Hanke and Zamstats in this battle of inflation? To answer this question, we first need to understand what an inflation rate is and how it is calculated.
Inflation is said to take place when the prices of goods and services rise in an economy. The inflation rate is, on the other hand, the average rate at which prices are rising in an economy often expressed in terms of a year. Therefore, according to Hanke, prices in Zambia in 2023 rose by an average of 48%. On the other hand, according to Zamstats the rate of price increase in Zambia last year was only 13%.
The process of calculating an inflation rate is not a simple one that can be performed from one’s desk. In most jurisdictions around the world, calculating the inflation rate requires the sending out of an army of survey enumerators on a monthly basis to visit shops, supermarkets, market places and so on to collect information on the prices of goods and services that are relevant to a typical household (relevancy is itself determined by another survey that takes place every couple of years). After this price information is collected, statisticians then compute a weighted average price that is then used to calculate the inflation rate. This is the method that Zamstats followed to produce the 13% number that Hanke is disputing. This is also the method followed by many other statistics agencies in the world including the Bureau of Labor Statistics which calculates the inflation rate in the US.
So how did Steve Hanke calculate Zambia’s inflation rate? Did he send out a different army of enumerators who collected price information and arrived at a different inflation rate? The answer is no.
What Hanke does, working from the safety and luxury of his office in Maryland, is to calculate an inflation rate based on some simplistic assumptions underpinning the concept of Purchasing Power Parity (PPP). The basic idea behind PPP is that the inflation rate (i.e., the percentage change in prices) is approximately equal to the percentage change in the exchange rate.
Therefore, since we can always easily observe the percentage change in the exchange rate (exchange rates are always transparently quoted across Bureaux De Change in Lusaka), we can then calculate the “true” inflation rate as the percentage change in the exchange rate. If the rate of depreciation of the Zambian Kwacha was 48% last year, then the inflation rate last year was, voilà, 48%!
One can already see that Hanke’s approach is a dangerously simplistic way of dealing with a very important and complex problem — why have a Zamstats in the first place if Hanke can easily calculate inflation rates for us? For one thing, there is very weak real-world evidence in support of the PPP concept on which Hanke bases his work. Second, and buried in the details, is that the PPP approach assumes negligible to zero inflation in the US, something that hasn’t been true in the recent past (PPP requires a comparison country which is often the US). Relatedly, the condescending presumption is that we can always trust the US’s statistics agency but we can’t trust Zambia’s. (Ghanian economist J. Atsu Amegashie did a wonderful job of taking apart Hanke’s work in this post last year after Hanke decided to go after Ghana’s statistics agency).
All this to say that I have a great deal of confidence in the inflation numbers being published by Zamstats. Calculating the inflation rate is part of their bread and butter and they have done it since time immemorial and have, therefore, accumulated the necessary skills to do this work properly.
To be sure, Zambia’s inflation rate has continued to rise over the last year or two with grave consequences for the welfare of the country’s population, especially its poor. And I am in agreement with those blaming the government’s patently misguided economic policy for this state of affairs. But there is no evidence supporting the claim that the government is manipulating the country’s statistics.