Underlying Inflation Exceeds Overall Inflation Rate: A Signal for Economic Vigilance
When underlying inflation surpasses the overall inflation rate, it signals an economic dynamic worth monitoring. Temporary price drops in volatile categories, such as food and energy, mask stronger and more persistent inflationary pressures elsewhere in the economy. This is indeed the case in Tunisia, where inflation stands at 4.9% as of late November 2024, with underlying inflation at 5.0%.
A Deceptive Calm
This divergence indicates that the fundamental inflationary trend, driven by internal factors and fueled by sustained demand, rising wages, and rigid service costs, remains high. From an economic perspective, this suggests that the calm implied by the lower overall rate is deceptive, and that fundamental price pressures are widespread and deeply rooted.
Implications for Monetary Policy
For the Central Bank, this situation is a warning signal that requires a cautious monetary policy stance, typically more restrictive. As it focuses on medium-term price stability, it looks beyond temporary fluctuations in raw materials to assess persistent trends. A high underlying rate warns that fundamental inflation is not receding as desired, increasing the risk that businesses and consumers begin to anticipate durably higher inflation, which can trigger a self-reinforcing spiral of wage and price hikes.
Central Bank's Response
Consequently, the Central Bank of Tunisia's (BCT) current response is to maintain a cautious stance. This means it will tend to keep its benchmark interest rate at its current level for a longer period. The primary objective is to tighten financial conditions sufficiently to cool the domestic demand that fuels underlying inflation, thereby anchoring long-term expectations and ensuring that the temporary drop in overall inflation does not undermine the broader fight for price stability.
Conclusion
In conclusion, the BCT's prudent approach is a signal that it is committed to maintaining price stability, even if it means keeping interest rates high for a longer period. This decision is driven by the need to address the underlying inflationary pressures that are driving prices up, and to prevent a self-reinforcing cycle of inflation from taking hold. By taking a cautious stance, the BCT aims to ensure that the economy remains on a stable path, with low and stable inflation, which is essential for sustainable economic growth.
