Increasing power tariffs drives up the cost of production, especially for the industrialists, which in turn increases the price of goods and services.
Ugandans should brace for higher cost of living this year as inflation continues to accelerate by a rise in electricity tariffs and the effects of the exchange rate depreciation.
The Consumer Price Index (CPI) released by the Uganda Bureau of Statistics (UBOS) yesterday indicates that inflation inched closer to double digits after it accelerated by 0.2 percentage points to 9.3% in December from 9.1% the previous month.
According to Chris Mukiza, the director of macroeconomic statistics at UBOS, the main drivers for the rise in inflation are a rise in core inflation and energy, fuel and utilities inflation.
Core inflation — which excludes food, fuel, electricity and metered water, which are volatile to price changes — rose to 7.4% from 6.7%, which is 2.4 percentage points higher than the 5% Bank of Uganda target.
The annual energy, fuel and utilities (EFU) inflation on the other hand accelerated to 12.2% from 12.1% the previous month.
The rise in core and EFU inflation was mainly due to shilling depreciation and an increase in the electricity tariffs. For instance, in October, the Electricity Regulatory Authority, the industry regulator increased power tariffs, with that of domestic consumers soaring to sh667.4 per unit, from sh558.4.
Commercial consumers on the other hand, had to pay sh604.6 from sh508.6, per unit, sh577.1 for medium industrial users up from sh328.7, while large industries pay sh386.1 from sh328.7.
Increasing power tariffs drives up the cost of production, especially for the industrialists, which in turn increases the price of goods and services. This is because the high productions costs are passed onto the consumer in form of high commodity prices.
Core inflation on the other hand rose due to the tightening of the Central Bank Rate (CBR), which has made borrowing more expensive and inaccessible to the private sector thus reducing money in supply.
The rise in consumer prices in recent months has been worrying the Bank of Uganda, which responded by hiking the Central Bank Rate (CBR) to curb inflationary pressures, it recently maintained the December rate at 17%. The CBR had increased it from 16% in October to 17 in November.
The BOU governor Emmanuel Tumusiime Mutebile argued that there has been stabilisation in monthly core inflation in the last three months as the tightening of the CBR since April 2015 starts to curb inflationary pressures.
Mutebile, however, said at the December Monetary Policy Statement media briefing that annual core inflation is forecast to peak at around 10% in the third quarter of 2016 before gradually declining towards the 5% target over the medium term.
With inflation continuing on an upward trend, however, further tingeing of the CBR is expected. This in turn is expected to make borrowing more expensive, which will then slow down private sector investments and economic growth.