Drivers of Inflation in Sub-Saharan African Countries: A System Generalized Moment Method

Abstract

This research aims to establish the causes of inflation in Sub-Saharan Africa (SSA) countries through the use of the demand-pull theory and the cost-push theory of inflation as the theoretical framework and the system generalized method as the analytical framework. Panel data for 36 SSA countries covering 34 years was used. The descriptive analysis indicated that inflation rates in SSA countries track the money supply, while periods of high economic growth were associated with relatively low inflation. On the other hand, the result of the regression analysis indicated that factors like money supply, population growth, and last year’s price positively relate to inflation while economic growth, government spending, and exchange rates negatively relate to inflation in SSA countries. These findings provide evidence for both the quantity theory of money and the demand-pull theory of inflation. To curb inflation in SSA countries, it is necessary to promote economic growth. A tight monetary policy helps to manage the levels of short-run inflation by restricting aggregate demand, whereas productive government spending helps to manage the inflation levels in the long run owing to the gains made in productivity. Inflation can thus be managed effectively by adopting a well-balanced strategy.