On the Drivers of Inflation in Sub-Saharan Africa

The perception that inflation dynamics in Sub-Saharan Africa (SSA) are driven by supply shocksimplies a limited role for monetary policy in influencing inflation in the short run. SSA's rapidgrowth, its integration with the global economy, changes in the policy frameworks, among others,in the last decade suggest that the drivers of inflation may have changed. We quantitativelyanalyze inflation dynamics in SSA using a Global VAR model, which incorporates trade andfinancial linkages among economies, as well as the role of regional and global demand andinflationary spillovers. We find that in the past 25 years, the main drivers of inflation have beendomestic supply shocks and shocks to exchange rate and monetary variables; but that, in recentyears, the contribution of these shocks to inflation has fallen. Domestic demand pressures as wellas global shocks, and particularly shocks to output, however, have played a larger role in drivinginflation over the last decade. We also show that country characteristics matter—the extent of oiland food imports, vulnerability to weather shocks, economic importance of agriculture, tradeopenness and policy regime, among others, help in explaining the role of shocks.