Unchecked imports and the Middle East crisis threaten Ghana’s fragile food inflation anchor

The Middle East crisis has triggered a surge in global fuel and import prices, leading to a spike in Ghana's headline inflation by two percentage points and aggregate food inflation by 1.7 percentage points between March and September 2023. Economic managers believe they are successfully stabilising prices by using the USD/GHS exchange rate as a transmission mechanism.

However, if the Middle East crisis continues for several months and fuel prices stay high, the stabilising trend may reverse, leading to another episode of sharp currency depreciation similar to the one witnessed at the start of the Russia-Ukraine war, which would cause significant spikes in aggregate food inflation.

Over the past three decades, Ghana's food market has become increasingly volatile, with food inflation averaging around 8.9% over the long run and a baseline volatility of 4.9%. Food inflation in recent decades has been highly persistent, with random monthly economic shocks having a lingering effect on the following period, and seasonality no longer significantly affecting food inflation.

Food inflation shocks are highly persistent, with approximately 18.24% of a given month's unexpected inflation shock carried over as increased uncertainty and price volatility in the following month, and about 81.65% of the previous month's volatility directly carried over into the current month.

Ghana may be experiencing a new phase of food inflation, with three distinct eras identified between 1999 and 2026. The most recent regime began in March 2022, and external shocks and macroeconomic policy interventions have triggered these shifts. Historically, Ghana has witnessed major price shocks in 2001 and 2023, with a period of stability in between.

Food prices are slightly higher than the yearly average in December, September, February, November, October, January, and June, while they are slightly lower in August, April, May, March, and July.