Will Malawi's Inflation Continue Declining?

The main objective of this chapter is to examine and determine the main factors that have driven inflation rate in Malawi since 2001, with a special focus on the period 2013-2019, during which inflation rate has continuously declined reaching 9% in 2019, from 36% in 2013. The chapter also tries to assess whether this decline will continue as per the performance of the underlying economic fundamentals both in the short- and the long-run. The study employs the autoregressive distributed lag (ARDL) model framework to examine the drivers of inflation both in the short- and the long-run using quarterly data, over the period of 2001-2019. The results reveal that reduction in headline inflation has mainly been driven by money supply growth, fiscal deficits, and output growth in the short-run, while only output has driven inflation decline in the long-run. The results also show that after floating exchange rate in 2012, inflation decline has mainly been driven by output growth despite inflationary pressures from the exchange rate and import prices. Model forecasts show that inflation may increase up to 19.4% by December 2020, if money supply growth, fiscal deficits, and exchange rate movements are not taken care of.