Novel approach to inflation management

Global growth to slow through 2023, adding to risk of ‘hard landing’ in developing economies
Spread of COVID-19 variants alongside inflation, debt, and inequality intensifies uncertainty

Activities in the global economy in recent years have been greatly impacted by volcanic eruptions, earthquakes, tsunamis, pandemics and wars, among significant others. Consequences of the foregoing occurrences on individual economies such as Ghana have been dire. One of the perennial economic effects that the country has to grapple with is inflation.

Temporary or prolonged surge in inflationary level may be triggered by negative supply shocks such as wars (Russia-Ukraine), oil shortages and trade disruptions, among other pertinent factors.

Indeed, ever-changing dynamics in the global business environment necessitate review of traditional method of tackling inflation head-on, since some of these orthodox approaches appear to have minimal positive effect on economic outcomes in recent periods.

Step 1: Make-Up Policy

The above-mentioned challenges lend strong credence to adaption and implementation of the make-up policy.Undoubtedly, a new approach to monetary policy relates to implementation of the make-up policy. This policy serves as the new monetary policy framework for inflation.

To address the phenomenon, the Bank of Ghana (BoG) must make up for past misses in its inflation target in a systematic manner to eventually restore the economy to its pre-downturn or pre-pandemic growth path. The make-up policy has the potential to cause temporary decline in inflationary level.

Step 2: Average Inflation Targeting (AIT)

The second step relates to implementation of the Average Inflation Targeting (AIT) approach. This paradigm posits, average inflation rate over a given number of fiscal periods should equal the target inflation rate. Consequently, above-target inflation during one period would require below-target inflation in subsequent period or periods, vice versa. This would ensure stability in the path of price level.   

AIT urges central banks to allow inflation to run temporarily above its target, especially when the economy is emerging from a recession; or from the shackles of major pandemic outbreak such as COVID-19; or emerging from any other major downturn.

To elaborate further, AIT emphasises the need for any above-target inflation caused by shocks to be offset by lower inflation at a later fiscal period. Conversely, below-target inflation created in a current year would require increase in inflation in subsequent years to offset the differential. Strategic implementation of average inflation targeting is required to assure rapid restoration of the Ghanaian economy to its pre-pandemic growth path.

Table 1: 10% Inflation Target Under Two Versions

IT Version Year 1 Year 2 Year 3 Year 4 Year 5 Average
OIT 10% 22% 10% 10% 10% 12.4%
AIT 10% 22% 4% 4% 10% 10%

Data in Table 1 depict hypothetical 10% inflation target (IT) under ordinary inflation targeting (OIT) and average inflation targeting over a five-year period for the Ghanaian economy. The illustration suggests both targets would be successful during Year 1 at 10%. However, during Year 2, shocks would cause the target (10%) to be exceeded by 12%, resulting in inflation rate of 22% (10% + 12%) for both versions. During Year 3, the Monetary Policy Committee’s (MPC’s) response to each mechanism would diverge.

AIT depicts correction for the 12% (22% – 10%) in Years 3 and 4. The excess (12%) is split in half (6%) and subtracted from Years 3 and 4, thereby reducing inflation to 4% (10% – 6%); or 6% less than the target (10%) for the next two years.

Difference Between OIT and AIT

OIT shows average inflation rate of 12.4% (see Table 1). This is because there was no make-up for the inflation increase in Year 2. Under OIT, “bygones” are “bygones;” there is no need to consider making up for the excess inflation in subsequent periods. The overarching strategy is to get the economy back on track; and work towards the new 10% inflation target in Year 3.

Nonetheless, AIT results in an average inflation rate of 10% over the entire five years (as illustrated in Table 1); owing to the make-up for the differential recorded during Year 2; in Years 3 and 4. Overtime, AIT would return price level to its trend growth path of 10%. Thus, AIT has the potential to create an outcome identical to a price level target (PLT).

Figure 1: Trend Path for Average Inflation Targeting

When BoG (through MPC) reacts promptly and practically to above-inflation targets, average inflation target and price level target would remain identical in the real economy. However, the same cannot be said of ordinary inflation target.

 Benefits of AIT

  • Average inflation targeting has the potential to boost households and businesses’ confidence in the economy; households and businesses would not cut-back on spending. Thus, through the implementation of AIT, households and businesses would prevent probable occurrence of another post-pandemic downturn or recession.
  • The economy would avoid further financial stress; restore originally expected incomes; and restore originally expected price level path in the medium- and long-term.


Negative internal and external shocks (ostensibly supply shocks) seem to be weakening the Ghanaian economy. Although the Monetary Policy Committee may be tempted to see through temporary inflation triggered by supply shocks, it remains imperative for MPC to be red-alert; and to tighten the monetary policy, should the economic environment so-demand to curb the surge in inflation. Revamp of the Tema Oil Refinery (TOR) should be prioritised to reduce the impact of fuel prices on the economy.

Tightening monetary policy in the face of weakening economy would enhance credibility of the Monetary Policy Committee and Bank of Ghana. It would assure local and foreign investors; and the international financial community of Ghana’s institution and implementation of pragmatic measures to return the economy to positive and sustained growth paths.

The writer is the Executive Head of Research, Media, Business Intelligence

& Market Conduct,Ghana Association of Banks (GAB),


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