Lowest deflation rate recorded in June 2020

Aerial view of the capital of Maldives, Malé City | Photo: RFP

Malé, Maldives – Maldives Monetary Authority (MMA) has reported that the Maldivian economy saw the lowest deflation in June 2020.

In 2020, Maldives faced an economic downturn amidst the Covid-19 pandemic. The country reported a Real GDP growth rate of -29.3 indicating negative economic growth with which the contraction in growth, deflation has followed.

In the first 3 months of 2020, the country has positive inflation rates. However, with the spread of Covid19 and the trade restrictions that followed, the economy saw major deflation even until the end of 2020. Quarter 2 of 2020 had extremely high deflation rates with June recording the highest rates at -4.5%. In Quarter 3 and Quarter 4, the deflation remained within a range of -1.3% to -0.9%.

The Consumer Price Index (CPI) which is the measure of inflation showcases how the deflation occurred. The CPI of Male’ in 2020 shows that housing, water, and electricity had a fall in prices. Furnishing household equipment also had a decrease in the prices. Transport prices also suffered from deflation, however the deflation remained stable at 1.6 in the second half of the year. Information and Communications had a drastic fall in prices with deflation rates of -12.0%, -11.9% and -11.6% throughout the year.

The CPI of Atolls in 2020 also showed similar results. However, in Quarter 2 of 2020, the housing, electricity and gas prices throughout the atolls had a sharp decline at over -20%. In Quarter 3 and Quarter 4, the prices bounced back, but are still deflated. Like the capital, the information and communication prices went through a severe decrease ranging from -2.3% in January to -12.8% in December.

While deflation in theory seems like a beneficial thing in terms of consumer spending, the long term consequences of deflation are worrying. As consumers wait until the prices go even lower, this decreases consumer spending and demand, a vital component of GDP of an economy. This is worrying as deflation often signals a recession. A recession is often followed by a fall in investments, a rise in unemployment and negative economic growth.