Final report ETH-21179 March 2022

Distributional impacts
of inflation in Ethiopia

Seid Nuru Ali

Distributional Impact of Inflation in Ethiopia

International Growth Centre

Addis Ababa

March 2022
 Abstract

By computing consumer price indices across low, middle, and high income groups in
Ethiopia for the period 2016 -2021, it has been found that high food inflation affects
adversely households in the low income group whose food consumption
expenditure in the total consumption expenditure is high. Weights for the
calculation of the price indices have been calculated using the Ethiopian Household
Income, Consumption and Expenditure Survey of the year 2016. The share of food
and non-alcoholic beverages in the total consumption expenditure for the low,
middle, and high income groups are found to be 63.8 per cent, 55.0 per cent, and
41.7 per cent, respectively. The low income group of household experienced a 7 to 9
percentage point difference in food inflation above the food inflation experienced
by high income group during periods of high rate of food inflation between 2020
and 2021.

1. Introduction
Ethiopia had been enjoying a low rate of inflation until 2005 except during drought years such
as in 2003. In fact, food price defilation was observed following bumper harvests between 1998
and 2002 to the disadvantage of rural farmers. Inflation in the country begun to soar since 2005
due to a combination of multiple factors such as purchase of grains by the government at
pre-set prices, accommodative expansionary policy, and devaluation of the domestic currency,
Birr, against the US dollar. The rise in prices was compounded by the global financial crises
observed in 2008. A month to month annual inflation that was registered in the Ethiopia in July
2008 remained the highest rate of inflation in the country after 1991/92. The period between
2013 and 2017 was characterized by single digit non-accelerating rate of inflation. The rise in
non-food prices that was observed in 2018 was further strengthened by the upsurge in food
prices the following years. Food and non-food inflation rates in the month of February 2022
reached 41.9 per cent, and 22.9 per cent, respectively, constituting to a general rate of inflation
of 33.6 per cent.

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Figure 1: Trends of inflation in Ethiopia

Source: Authors’ computations using data from Central Statistical Services (CSS) of Ethiopia

Until recently, demand-driven growth accompanied by expansionary monetary policy was to

blame for the seemingly stubborn high inflation in the country. The recent phenomenon of
inflationary pressure is believed to have been a cumulative effect of a series of supply side
shocks and demand management policies. Empirical identification of drivers of inflation in this
particular case is in itself a compelling task.

Another interesting aspect of a rising inflation such as this is its redistribution effect on
consumers. As it can be observed in Figure 1, non-food inflation is relatively stable and usually
lower than that of food inflation. In contrast, periods of high inflation in Ethiopia are mainly
associated with high rate of inflation in food prices. This may imply that inflation impact
households who spend a larger proportion of their income on food more severely than
households who allot a larger portion of their income on on-food items. The report by the
Central Statistical Services (CSS) of Ethiopia of the consumer price index (CPI) is based on the
aggregate share of commodities in the total consumption expenditure as a weigh. Based on the
2016 Ethiopian Household Income, Consumption and Expenditure (HICE) survey, the share of

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households’ expenditure on food and non-alcoholic beverages out of their total expenditure is
estimated to have been 53.5 per cent. In the capital, Addis Ababa, household expenditure on
food and non-alcoholic beverages is estimated to have accounted for 43.2 per cent of their total
consumption expenditure.

It is difficult to investigate the impact of inflation on different income groups based on such
consumer price indices calculated by using aggregate weights regardless of the level of income
of consumers. The purpose of this exercise is to estimate consumer price indices across
different income groups and shed light on the possible distributional impact of inflation on
households of different income groups.

2. The CSS Methodology

Central Statistical Agency (CSA) conducts a Household Income, Consumption and Expenditure
(HICE) survey every five years. The result from this survey is used to identify the goods and
services bought by typical consumers or households which should be included in the baskets of
goods and services used to monitor price changes. Furthermore, the result from HICE survey is
used to determine the weight of the goods and services included in the basket. The weight of
specific goods and services is calculated by dividing the total expenditure spent by all
households in a region/country on specific goods and services by the total expenditure spent on
all goods and services by all households in the region/country. These calculated CPI weights are
fixed for each goods and services and stay the same for the next period until the result of the
next HICE survey is become available.

CPIs Compiled by Ethiopian Statistical Service the former CSA:

● Addis Ababa CPI (1963 – 1996).

● The 1995/96 Based National CPI.
● The December 2000 based National and regional CPI.
● The December 2006 based National and regional CPI.
● The December 2011 based National and regional CPI.
● The December 2016 based National and regional CPI.

The next CPI will be rebased using December 2022 as base period. HCES survey is done
approximately every 5 years and CPI is rebased accordingly. The CPI is publication consists of 9

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regions and 2 city administrations. The country level CPI is average of the 11 Regional CPIs.
Sidama and the new SW Ethiopia region will be considered in the next CPI re-basing.

Selection of Basket and Weight Assignment

An important factor in constructing a Consumer Price Index is to select the representative
basket of goods and services. Generally, the index is based on a sample of items (goods and
services) and the choice of what items to be included in the index is not always an easy task.
Whatever choice is made, there is a need to ensure that the items (goods and services) are
relevant, reliable, representative, and comparable over a period of time. It is desirable that
items chosen should be adequate in number and importance and representative of the items in
the group. For most practical purposes, items (goods and services) are included in the basket
because they are important in their own right or because they are considered as representative
of other items in the group. It is expected that changes in the prices of such items are likely to
approximate change for all items within the category. Though the procedure for choosing an
expenditure cut-off point is on the most part conventional, it is obvious that, resources play
some role in this regard.

From the outset, the idea of including all consumption items into the market basket of goods
and services is both cumbersome and unnecessarily costly in term of data collection and
processing. Furthermore, it doesn't make sense to include an insignificant weight into an index
basket which could not move the price relative up or downwards compared to the general market
trend. Besides, it is common international practice to apply a suitable expenditure cut-off point to come
up with manageable number of items (goods and services).

Keeping the above points in mind, the cut-off points for the determination of the baskets in the
December 2016 based indices is 0.05 or above per cent of total household's expenditure for most
regional baskets was selected. In some cases, when special items that are common for a specific region
are encountered even if, the expenditure weight are less than the cut-off points, that specification can be
included in the basket of that region.

The idea of a cut-off point means that the household goods and services whose relative importance fall
on or above the relative expenditure shares of the mentioned percentage point are included in the final
market basket of goods and services and are used in the construction of the index.

Those falling below these percentage points are excluded from the baskets and their expenditure shares
distributed within their respective sub-group classes or items as appropriate.

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The Major Groups in the Ethiopian CPI
The goods and services in the Ethiopian CPI are grouped according to the classification of individual
consumption according to purpose (COICOP) with some country specific adjustment. The twelve major
groups are:

01. Food and non-alcoholic beverages

02. Alcoholic beverages, tobacco and narcotics
03. Clothing and footwear
04. Housing, water, electricity, gas and other fuels
05. Furnishings, household equipment and routine maintenance of the house
06. Health
07. Transport
08. Communication
09. Recreation and culture
10. Education
11. Restaurants and hotels
12. Miscellaneous goods and services

Computation of Inflation Rates

● 12 months Moving Average: It is calculated as percentage change of the 12 months
moving average CPI between the current year and the 12 months moving average CPI of
the same period of the previous year.
● Year-on-Year: It is calculated as percentage change of the CPI between the current
month and the same month of previous year.
● Month-on-month: It is calculated as percentage change of the CPI between the current
month and the preceding month.

3. The Share of Commodities in Total Consumption across Income Groups

Using data from the Ethiopian HICE survey, shares of various groups of commodities in the total
household consumption expenditure has been estimated across three income groups: the low,
middle, and income group. The share of food and non-alcoholic beverages in low, middle, and
high income groups of households in the total household consumption expenditure is estimated
to be 63.8 per cent, 55 per cent, and 41.3 per cent, respectively. This variation contrasts from
the usual aggregate share of 45.8 per cent for food and non-alcoholic beverages.

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 The high share of non-food item in the total consumption expenditure for the higher income
group (58.3 per cent) and the high share of food in the total consumption expenditure in the
low income group (63.8 per cent) have different implications of welfare impact of inflation
depending on whether the inflation is driven by food or non-food items.

Table 1: Share of Commodity Items in the Total Household Consumption by Income Group
Share in the total consumption expenditure
Lower Middle High income All
Item income income group (20%) income
group (20%) group (60%) groups

Food and Non-Alcoholic Beverages 63.78 54.95 41.73 45.38

Food 60.43 52.24 39.75 43.2
Bread and Cereals 29.47 20.17 9.98 12.82
Meat 0.38 4.52 9.63 8.21
Milk, Cheese, and Egg 0.57 1.21 1.97 1.76
Oil and Fats 4.21 4.37 4.09 4.16
Vegetables and Pulses 16.82 14.52 9.18 10.64
Food products (salt, spice, and others) 6.99 5.89 3.87 4.42
Non-alcoholic Beverages 3.35 2.71 1.98 2.18
Non-Food Items 36.22 45.05 58.3 54.62
Alcoholic Beverages and Tobacco 0.22 0.62 1.80 1.53
Clothing and Footwear 2.95 4.13 4.95 4.72
Housing, Water, Electricity, Gas and other Fuels 15.56 16.74 17.93 17.60
Furniture, Equipment, and Maintenance of the House 4.58 4.62 6.57 6.04
Health 0.65 1.17 1.38 1.32
Transport 2.80 4.04 6.90 6.12
Communication 5.69 5.35 6.09 5.90
Recreation and Culture 0.34 0.42 0.68 0.61
Education 0.80 1.43 1.61 1.56
Restaurants and Hotels 0.31 2.99 6.42 5.47
Miscellaneous 2.00 3.33 3.93 3.76
Source: Authors’ computations using data from Ethiopian Household Income, Consumption and
Expenditure (HICE) Survey, 2016.

While there are quite a number of commodity items in the HICE, Table 1 presents only groups of
items with relatively significant shares in the total consumption.

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 4. Price Indices, Patterns and Trends of Inflation by Income Group
Prices indices are computed for Addis Ababa for three income groups; the lower, middle, and
high income group. Naturally, current and relative prices of common commodities purchased by
households of all income groups are the same across income groups. The variation in indices
and inflation rates across income groups arise from differences in the share of expenditure by
each group of a particular commodity in the total consumption expenditure. Some items of
commodities may not be purchased by households in a particular income group.

Since 2019, food inflation exceeded non-food inflation. Between 2019 and November 2021,
food, and non-food inflation averaged 26.1 per cent, and 14 per cent, respectively.

Figure 2: Trends and patterns of food and non-food inflation (2017-Nov. 2021)

Source: Authors’ computations using data from CSS.

The rise in food inflation at a rate greater than that of non-food inflation led to a difference in inflation
rate within income groups to the disadvantage of lower and middle income groups compared to high
income groups. The average food inflation for the period 2019 – 2021 stood at 26.1 per cent, 25.4 per

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cent, and 24.3 per cent for the low, middle, and high income groups, respectively. While the differences
appear to be marginal on a longer period, there were times where such differences were significantly
high. For instance, the difference in rates of food inflation between low and high income groups for the
period between mid- 2020 and 2021 range from 7 to 9 percentage points (See Figure 3).

Figure 3: Trends and patterns of food and non-food inflation (2017-Nov. 2021)

Source: Authors’ computations using data from CSS.

Similar to the pattern in the overall inflation across all income groups, food inflation dominated
the upsurge in the general inflation that has been observed since 2019.

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Figure 4: Trends of food and non-food inflation among low income groups

Source: Authors’ computations using data from CSS.

Prices rises in food items such bread and cereals, oils and fats, vegetables, food products mainly
spices, and non-alcoholic beverages drove overall price level in the low income groups. These
food items account for 63.8 per cent of the total consumption expenditure among the low
income group. Clothing and footwear, housing, furniture and equipment, as well as transport
are among the non-food items that experienced high rate of price rise. The contribution of
those later items to the overall inflation is reduced by the lower share of consumption
expenditure in the low income group.

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Table 2a: Major Commodity Items with High Inflation Rate among the Low Income Group

Weight Inflation Rate

Items 2016-2018 2019-Nov 2021
All Items 100 15.6 21.9
Food and non-alcoholic beverages 63.78 14.9 26.1
Food 60.43 15.3 26.4
Bread and Cereals 29.47 13.6 24.3
Oils and Fats 4.21 2.15 19.50
Vegetables and pulses 16.82 4.50 19.15
Food products 6.99 73.50 63.72
Non-alcoholic beverages 3.35 8.82 19.38
Non-food 36.22 16.91 14.07
Clothing and Footwear 2.95 9.75 17.85
Housing, Water, Electricity, Gas and other Fuels 15.56 24.02 16.52
Furniture, Equipment, and Maintenance 4.58 22.52 19.35
Transport 2.8 2.20 12.71
Communication 5.69 5.27 1.07
Source: Authors’ computations using data from CSS.

Rise in food inflation also dominated the general inflation in the middle income group. Food
inflation in the middle income group accelerated from 14.9 per cent during 2017 – 2018 to 25.4
per cent for the period 2019-2021. In contrast, non-food inflation for the middle income group
decelerated from 21 per cent to 15.9 per cent over the same period. Given the high share of
food and non-alcoholic beverage in the total consumption expenditure of the middle income
group (54.95 per cent), the rise in food inflation would adversely affect households in this group
more proportionately than those in the high income group.

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Figure 5: Trends of food and non-food inflation among middle income groups

Source: Authors’ computations using data from CSS.

In the case of middle income group, two commodity items namely meat, and restaurant and
hotels are included due to a relatively higher share of consumption expenditure compared to in
the low income group in addition to the items already identified in low income groups.

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Table 2b: Major Commodity Items with High Inflation Rate among the Middle Income Group

Weight Inflation Rate

Items 2016-2018 2019-Nov 2021
All Items 100 17.6 21.2
Food and non-alcoholic beverages 54.95 14.9 25.4
Food 52.24 15.2 25.7
Bread and Cereals 20.17 13.2 23.4
Meat 4.52 15.11 22.18
Oils and Fats 4.37 4.1 19.5
Vegetables and pulses 14.52 4.4 18.9
Food products 5.89 74.0 64.0
Non-alcoholic beverages 2.71 8.6 18.7
Non-food 45.05 21.0 15.9
Clothing and Footwear 4.13 10.6 16.8
Housing, Water, Electricity, Gas and other Fuels 16.74 34.4 20.3
Furniture, Equipment, and Maintenance 4.62 22.0 18.4
Transport 4.04 2.4 13.8
Communication 5.35 6.0 1.2
Restaurants and Hotels 2.99 25.86 17.21
Source: Authors’ computations using data from CSS.

Figure 6: Trends of food and non-food inflation among high income groups

Source: Authors’ computations using data from CSS.

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A relatively low share of food in in the total consumption expenditure in the high income group
helped to shift the impact of high food inflation towards non-food items which face relatively
low rate of inflation.

Table 2c: Major Commodity Items with High Inflation Rate among the High Income Group

Weight Inflation Rate

Items 2016-2018 2020-Nov 2021
All Items 100 20.58 20.07
Food and non-alcoholic beverages 41.73 15.42 24.25
Food 39.75 15.79 24.59
Bread and Cereals 9.98 13.19 22.93
Meat 9.63 15.47 21.87
Oils and Fats 1.97 7.07 19.30
Milk, cheese, and egg 4.09 16.26 16.87
Vegetables and pulses 9.18 5.25 18.60
Food products 3.87 74.11 64.07
Non-alcoholic beverages 1.98 7.74 16.18
Non-food 58.3 24.29 17.14
Clothing and Footwear 4.95 11.28 16.71
Housing, Water, Electricity, Gas and other Fuels 17.93 46.40 24.67
Furniture, Equipment, and Maintenance 6.57 21.97 17.41
Transport 6.9 5.84 11.74
Communication 6.09 7.36 1.45
Hotels and Restaurants 6.42 26.65 16.97
Source: Authors’ computations using data from CSS.

5. Implications
Policy interventions need to assess the varied level of impact of inflation across income groups.
Consumption subsidies, support to productions, and policy interventions to deal with major
supply bottlenecks in an attempt to arrest inflation need to prioritize vulnerable income groups.

Impact of inflation may also have geographic dimensions. Further studies and data collections
may focus on such dimensions of impact of inflation.

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