Examining inflation rates trends and their economic significance

Data from the General Statistics Department for July 2023 indicates an increase in the inflation rate by 0.92 per cent (less than one percentage point) compared to the same month in 2022. This is a clear indicator of a decline in inflation rates, which can have multiple explanations, especially since this indicator is the best measure of inflation rates, as will be explained below. The Consumer Price Index for July 2023 also slightly increased by 0.07 per cent compared to the previous month. On a cumulative level, the CPI for the first seven months of this year witnessed a 2.68 per cent increase compared to the same period in 2022.

The inflation rate reflects changes in the general price level over a certain period, often measured annually and sometimes monthly or for a specific period compared to the same period in a previous year. Analysing the inflation rate helps economists and policymakers track the increase or decrease in prices during the specified time frame.

When measuring inflation on a monthly basis, it tracks price changes from month to month, making it more volatile as it captures short-term price fluctuations. This is useful for businesses and consumers who want to understand the immediate impact of price changes on their budgets and spending decisions. However, it can be influenced by temporary factors such as seasonal fluctuations or one-time events, which may not accurately reflect the underlying inflation trend. Therefore, countries often rely more on the annual inflation rate (year over year) as it compares prices from the current month to the same month in the previous year. Yearly inflation is less volatile and tends to provide a more stable and reliable indicator of longer-term price trends, offering a better understanding of the overall inflation trend. Central banks and policymakers often use year-over-year inflation as a basis for monetary policy decisions.

Which measure is most suitable depends on specific needs. Monthly inflation is more suitable for short-term planning purposes, so if you make monthly adjustments to your budget or track short-term economic conditions, you'll want to pay attention to month-to-month inflation changes.

If you are planning for the long term, year-over-year inflation is usually more beneficial. It helps individuals, companies and policymakers gain insights into broader and longer-term inflation trends, enabling more stable and long-term decisions.

In practice, many analysts and policymakers consider both month-to-month and year-over-year inflation to gain a comprehensive understanding of inflation dynamics. They complement each other by providing insights into both immediate price changes and longer-term trends, allowing for a more complete understanding of the inflation environment. Since countries are more concerned with long-term planning, the annual inflation rate is the one that should govern monetary and fiscal policy decisions.

Inflation dynamics are typically influenced by a variety of factors, including changes in supply and demand for goods and services, monetary policy (such as central bank interest rate adjustments), fiscal policy (such as government spending and taxation), external shocks (such as fluctuations in oil prices and global food and commodity prices, known as imported inflation), and future inflation expectations.

The policy of pegging the Jordanian Dinar exchange rate to the US Dollar, followed by the Central Bank in Jordan, makes monetary policy more closely tied to US monetary policy. The recent decision by the US Federal Reserve to maintain federal interest rates has served Jordan's monetary policy, especially given the annual inflation rates measuring below 1 per cent. The question that arises is, "Do the decreases in inflation rates reflect an economic slowdown and the possibility of entering an economic recession in the coming months?" This is what we will address in the next article.