Country Report Uganda March 2011

Economic performance: The threat of rising inflation looms

The concerns expressed by the Bank of Uganda about the threat of rising inflation were reinforced by an increase in prices recorded in January, when annual headline inflation reached 5%. This figure followed two successive rises in the annual headline rate from a level of only 0.2% last October. The rising trend was evident in all price groups, but was particularly marked in food-crop prices, which increased by 24% in six months. Annual inflation for food prices overall, which constitute 27.2% of the consumer price index, was 3.6% in January. The increases in food-crop prices were attributed by the authorities to domestic supply shortages, but overall inflation was exacerbated by imported inflation because of global price increases as well as the depreciation of the shilling.

In its December reports, the central bank said that it expected inflation to remain within its 5% core target, but it listed three external factors that could have a negative impact on domestic prices. The first factor was inflation in two of Uganda's major trading partners, China and India, which recorded annual rates of 5.1% and 9.7% respectively, in October 2010, which will feed through into imported inflation. The second factor was the fear of a global food crisis following extreme weather conditions in several major food-producing regions, which could push up global prices. The final factor was rising international oil prices, fuelled by growing demand, particularly in developing countries. This worry, moreover, was identified before the current wave of social unrest that has swept across North Africa, further disrupting oil supply and increasing prices (depending on the price, oil constitutes 10-15% of Uganda's import costs). We expect that these factors will push inflation up to an average of 9.5% in 2011.

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