(Ecofin Agency) - The Central Bank of West African States (BCEAO) reports an increase in the inflation rate within the West African Economic and Monetary Union (WAEMU). From -0.5% in December 2019, the inflation rose to +2.5% in July 2020, reflecting an accelerated and continuous rise in food prices over the first 7 months of 2020.
Rising prices may have certain advantages, particularly for the macroeconomy. Developed economies in Europe and America are now seeking inflation close to that of the WAEMU and even beyond; this, to achieve better financial sector balances. The Federal Reserve, the institution that serves as the central bank in the United States, has revised its inflation targets upward to restore the economy's strength.
But inflation has a bad side, especially in economies that are not sophisticated enough with financial products that can cover investors in difficult times. One of the consequences is that it weighs negatively on the net profitability of securities, whose yields are fixed interest rates.
With 12-month maturity bonds issued by WAEMU states, which yields a maximum of 5.2% interest, the net gain for investors if inflation remains at its July 2020 level is only 2.7%. But there are variations.
With inflation in Mali at only 0.6%, investors in this country who target the sub-regional money market realize the highest returns. Those who earn the least are investors from Niger, with less than 1% in net return. The inflation level there was 5.2%.
Inflation trends should be monitored in the WAEMU zone, particularly for food products. When prices rise in this segment, households have a greater need for income and this can weigh on business productivity.
For the time being, low prices in the WAEMU's main import markets still make it possible to contain a probable crisis.