The Impact of Inflation Rate on Private Consumption Expenditure and Economic Growth—Evidence from Ghana

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.