Steps taken to investigate the price behavior
: The reason that this example is important in
price analysis is that a structural shift of an economy requires a fresh understanding of how
prices will behavior. This change in price behavior can be both in magnitude (the level that
prices will rise and fall around) and variability (stability). In the above example there are
clear differences in the behavior between the imported (rice) and domestically produced
(millet) commodities. Although in both cases there was stability in the price of both
commodities, the imported commodity reacted quicker to the devaluation of the CFA
compared to the domestically produced commodity. The price of imported rice immediately
was driven up as a result of the devaluation, and took a long time to stabilize. The price of
millet in this market did not begin to rise until a year and a half later. Although there has
been a steady increase in millet prices since May 1996, there has been a substantial amount
of variability in imported broken rice prices since earlier 1996 after a steady price rise.
Action taken/follow up
: The question to answer is so what? . The information as to
how prices adjust to new levels and variability is important knowledge to have when
trying to understand what is normal in terms of price behavior. In this case, the new
normal involves a higher level of prices and more variability for the price of imported
rice and higher prices only for millet.
5.3.2 Looking at real and nominal prices in Zambia
Observed price pattern:
REAL AND NOMINAL MAIZE PRICE COMPARISON FOR LUSAKA
This is an important case study since inflation distorts the price pattern such that it
becomes difficult to interpret. This is potentially a problem in many countries.