TITLE:
The Impact of Inflation Rate on Private Consumption Expenditure and Economic Growth—Evidence from Ghana
AUTHORS:
Babalola Emmanuel Olusola, Muruako Emmanuel Chimezie, Selma Magano Shuuya, George Yaw Asare Addeh
KEYWORDS:
Private Consumption Expenditure, Inflation, Economic Growth, Granger Causality
JOURNAL NAME:
Open Journal of Business and Management,
Vol.10 No.4,
June
9,
2022
ABSTRACT: The effect of inflation on an economy has far-reaching implications. One
of the most significant effects of inflation is the uncertainty created when
the inflation rate is fluctuating, which can reduce or increase consumer
purchasing power. The study employed the Engle-Granger Cointegration, error
correction, and granger causality as estimation techniques to determine the
association between inflation rate and
private consumption expenditure. In this study, using the ordinary least
square econometric method, the study empirically assessed the impact of inflation on private consumption expenditure and
economic growth between 1990 and 2020. The data were first analyzed
using the Augmented Dickey-Fuller (ADF) test which indicates that all the
variables of interest were stationary after their first differencing. The study
found a cointegration relationship between
private consumption expenditure, inflation rate, interest rate, and
gross domestic product rate. The study found that in the long run, INF has a
negative significant effect on PconX, while
INTR and GDPR have positive significant effects on PconX. The study’s empirical
findings show that there is a long-run negative significant relationship
between inflation and private consumption expenditure in Ghana, meaning that
private consumption expenditure in Ghana reduces on products and services
during periods of high inflation than during periods of low inflation”.
According to the findings, inflation expectations have a detrimental impact on
private consumption expenditure attitudes, particularly among consumers in a
very favorable financial situation. Furthermore, since the global financial crisis, the importance of inflation expectations
has grown. The results for consumption
expenditures are quite evident and difficult, particularly when compared
to the results for interest rates and economic growth, as they imply a positive
and relatively strong relationship to inflation. As a result, based on the
findings of the study, the research advised that the government should provide
low and stable prices at all times to prevent the negative impact of inflation
on private consumption. Also, it was advised that the government, in
collaboration with the Bank of Ghana, formulate and implement prudent fiscal and monetary policies aimed at stabilizing
macroeconomic factors to boost economic growth.