1. INTRODUCTION:

Inflation can be defined as a sustained or continuous rise in the general price level or, alternatively, as a sustained or continuous fall in the value of money. Several things should be noted about this definition. First, inflation refers to the movement in the general level of prices. It does not refer to changes in one price relative to other prices. These changes are common even when the overall level of prices is stable. Second, the rise in the price level must be somewhat substantial and continue over a period longer than a day, week, or month. However, if the rise is a continuous drop instead, it is called deflation.

There are many measures of inflation, because there are many different price indices relating to different sectors of the economy. Two widely known indices for which inflation rates are reported in many countries are the Consumer Price Index (CPI), which measures the rate of change in the prices of goods and services bought by the consumers, and the GDP deflator, which measures prices of locally-produced goods and services (CSA, 2001).

In Ethiopia raw inflation figures are reported monthly using the Consumer Price Index (CPI) by the Central Statistical Agency. The CPI is an estimation of the price changes for a typical basket of goods. In other words, the prices of everyday goods such as housing, food, education, clothing, etc., are compared from one month to the next and the difference represents the CPI. The CPI published by CSA composed of the weighted average of two sub-indexes that reflect the development of prices of goods production in certain sectors of economy, namely food and non food prices (CSA, 2005).

1.2. Concepts and Measurements of inflation and Computation:

A price index is a weighted average of the prices of a number of goods and services. Inflation rates are calculated from different price indices.

a. The consumer price index (CPI):

Consumer Price Index (CPI) is the measures changes in the prices of basket of goods and services that households consume. Such changes have an effect on the real purchasing power of consumers’ incomes and their welfare. When the prices of different goods and services vary by different rate, a price index can only reflect their average movement. The types of inflation measurement provide different outcomes with their respective purpose. The CPI measures only the change in the price of consumer goods and services.

b. Producer price index (PPI):

It measures the general price level at the producer stage. These are generally the prices charged by the producers at the level of their first commercial transaction. These are of course the wholesale prices charged at the first link of the distribution chain. These prices are easy to obtain and monitor. The construction and interpretation of this index is broadly the same as that of the consumer price index.

c. GDP-Deflator:

It is the ratio of nominal and real gross domestic product.

In the past, rise in prices in Ethiopia were associated with fall in output (mainly agricultural harvest) and years of high production were accompanied by fall in price. In 2000/01, for example, output grew by 8.3 percent (mainly due to a 9.6 percent increase in agricultural output) and consumer price index decreased by 5.2 percent (owing mainly to a 10.4 percent de crease in food price). In the following two years there was a significant fall in agricultural production due to unfavorable weather condition. Particularly, in 2002/03 agricultural output decreased by 10.5 percent and the consumer price index increased by 15.1 percent (with food price growing by 24.8 percent). In recent years, however, this trend seems to have reversed with prices soaring despite fast growth in output. From 2003/04 onwards, output on average grew by 11.8 percent per annum while during the same period, prices have grown by 11.4 percent per annum (MoFED, 2007/08 and NBE, 2006/07).

There are different empirical studies on the possible sources of this inflationary situation in the country. The major sources of inflation discussed in the literature are increase in money supply unwarranted by the level of output growth, the nature of investment in the country, the widening of the national deficit and ways of financing it, the inefficiency within government-controlled organizations, soaring of oil prices and others (Geda and Tafere, 2008; Goodo, 2008; Seid, 2008). In contrast, the government argues that the inflation is due to rapid economic expansion that has happened in country. They also indicate that oil prices and increase in world food prices as the possible sources of the inflation.

In Ethiopia, the food inflation rates show a general trend of increasing over the years 2004 to 2009, reaching highest level in 2009. At the national level, the food inflation rate steadily increased from a mere 3.4 percent in 2004 to 13.6 percent in 2006 and rose further to 61.1 percent by February 2009. The rise in the food inflation rate was due to the rise in the prices of cereals, pulses, meat, oils and fats, milk and eggs, vegetables and fruits, spices (especially whole pepper and chili), potatoes and other tubers and stems, other food items, and food taken away from home (John et al., 2009).

There are limited researches conducted on inflation and its correlates in southwest Ethiopia. The implication is that the inflation situations of the area were not given attention. Beside this, most research papers focus on the national level causes of inflation. Measuring, identifying the determinants and analysis of inflation, in Ethiopia becomes sound enough to put an agenda on the inflationary process, targeting of policy makers in intervening on that particular study area.

1.3. Objectives of the Study:

The main objective of this study is to identify the determinants of inflation by using regression models in Ethiopia. Specifically, this research aims:

· To identify the determinants of food and Non-food inflation in Ethiopia.

· To compare food and non-food inflation in Ethiopia.

· To study the relationship between consumer price index, food and non-food price index.

· To forecast the overall inflation (food prices and non food prices) for Ethiopia.

2. MATERIALS AND METHODS:

2.1. Data type and sources:

This study was conducted in Ethiopia. The study applied the secondary data type collected from different organization and institutions (CSA, Ministry of Finance and Economic Development (MOFED) and National Bank of Ethiopia).

2.2. Methods of Data Analysis:

The Z- test for the difference between two population means:

Suppose that there are two samples drawn independently from two populations with mean µ₁ and µ₂, respectively. Then, the test about the significance of the difference between the two means takes one of the following forms:

3. CONCLUSIONS AND RECOMMENDATIONS:

4.1. CONCLUSIONS:

The main objective of this study was to identify the key determinants of inflation by using regression models in the study area. Attempts were also made to identify the food and non-food inflation and compare them in the study area.

The results of the analysis showed that the non-food price index was higher than that of food price index. Reveals that the impact of variables on inflation were varies according to the variable status. The mean percentage of access of food and non-food productions (8.20%), money supply (8.20%), Tax (8.00%) and exchange rates (8.00%) were the highest percentages comparing to the other variables.

This study found evidence that some of the variables considered have significant influence on inflation. The rate of inflation (CPI), Access of food and non-food products, Access of raw material for production, Money Supply, Import, Producer Price Index, Exchange rate, Tax, Infrastructures and Farm Products were found to be important determinants of inflation whereas family size, employment status of the family (employment and unemployment), economic status of the family, family income, export, wages and place of residence were insignificant variables among the stated variables. From the result of multiple regression model, the rate of inflation (CPI) is increases with increasing of Money Supply, Import, Producer Price Index, Exchange rate and Tax and decreases with increases of Infrastructures, Access of food and non-food products, Access of raw material for production and Farm Products.

The coefficients in the logistic regression are based on what is called the odds-ratio. It is the factor by which the odds change when the independent variable increases by one unit. If β is positive, this factor will be greater than 1, which means that the odds are increased; if β is negative, the factor will be less than 1, which means that the odds are decreased. When β is 0, the factor equals 1, which leaves the odds unchanged. From the results for positive β, the Odd-ratio (ORs) are greater than 1 implies that the odds are increased and for negative β, the Odds-Ratio (ORs) are less than 1 implies that the odds are decreased.

4.2. Recommendations:

This study has tried to identify the determinants of inflation in stated study. Based on the results discussed above, the researchers would like to forward the following recommendations:

· The policy interventions aimed at tackling the current determinants of inflation need to take into account the priorities of the government as the effect of policy instruments highly depends on whether it is meant to temporarily deal with the inflationary problem or permanently reverse the inflation cycle.

· Money supply growth has been one of the prime determinants of inflation. Therefore, in order to be able to curb the upward trend in prices, it is essential to adopt conservative monetary expansion.

· Access Infrastructures (Electricity, Access of Road, Water, Telephone, etc) were the determinants of inflation in negative direction. Thus, Increasing the Access of Infrastructures will decrease the inflation process.

· Tax and exchange rate were positive determinants of inflation. Therefore, the government should decrease the tax to decreases the inflation.

· Agricultural Products and Access of inputs for production (Farm lands, Live stokes and etc) were the determinants of inflation. Therefore, increasing the agricultural products will important for control the inflationary process.

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Received on 10.08.2020 Modified on 05.09.2020

Research J. Science and Tech. 2020; 12(4):277-284.

DOI: 10.5958/2349-2988.2020.00037.6