Nexus between Inflation and GDP Growth

Abstract

Inflation has remained a global economic phenomenon for centuries. Historical antecedents revealed that some of the world’s wealthiest economies today succumbed to the threats of this macroeconomic nemesis (inflation) over a century ago. This research aimed to assess the effects of persistent rise in inflationary levels on economic growth. The economy of Ghana and the global economy remained the units of analysis. The current research was developed on the quantitative approach to scientific inquiry. Specifically, cross-sectional design was adapted and applied to the research. Data required for the conduct of the research were obtained mainly from secondary sources. These included textbooks, peer-reviewed articles published in journals, grey literature and newspaper publications. Other significant sources were Google Search Engine, including MacroTrends, and databases of the World Bank. Respective data on annual global GDP growth and changes from 1961 through 2020; annual global inflation rate and changes from 1981 through 2020; and respective data on Ghana’s annual GDP values from 1960 through 2020; GDP growth data from 1961 through 2020; and inflation values and changes from 1965 through 2020 were collected and used in the research. Further, annual averages for inflation, GDP, GDP growth, population, and GDP-to-population ratio were computed to reflect each political administrative period (1960 - 2020) and applied to the research. The study revealed that inflation remains a ubiquitous monetary phenomenon; and governments are often fingered for causing inflation whenever excise tax is imposed on mass consumption products and services. Inflationary effects remained non-linear. Ghana’s inflation “bubble bursts” manifested strongly from 1976 through 1983. Variations in inflationary levels are reflected in differences in the interplay of external and internal macroeconomic factors with tremendous influence in determining the future direction of the Ghanaian economy. A significant portion (83.93%) of Ghana’s annual inflation rates was in the running category, while hyperinflation constituted 12.5%. Nine annual inflation rates recorded by the global economy from 1981 to 2020 were in the mild category while running inflation was recorded over 27 (67.5%) fiscal periods. Ghana’s economy succumbed to eight negative GDP growth rates from 1960 through 2020. The best annual average GDP growth over an eight-year period during the Fourth Republic was recorded from 2009 to 2016 (6.49%). Geometric increase in average population size is counteracted by the arithmetic surge in average economic growth. Ghana’s economy has experienced only seven sustainable growth performances without potential side effects from 1961 through 2020. Sub-Saharan Africa and the Euro Area maintained the best (-2.45%) and worst (-6.68%) regional GDP growth performances during 2020. Findings from the statistical tests on the Ghanaian economy revealed a positive and significant relationship between inflation and GDP growth (coefficient value = 0.05974981; p = 0.006, p < 0.05). Inflation accounted for 12.99% of the variation in GDP growth from 1965 through 2020. The statistical output validated the influence of inflation on GDP growth, the potential of prevailing macroeconomic conditions to inflate the Ghanaian economy, and the urgent need for a mix of more expansionary macroeconomic policies to ensure economic stimulation without necessarily escalating inflation. Tests on the global economy revealed a positive but weak influence of inflation on GDP growth (coefficient value = 0.016075781; p = 0.856691, p > 0.05). Inflation accounted for only 0.09% of the variation in global GDP growth from 1981 through 2020. The statistical outputs did not validate the potential threat of inflation to the growth of the global economy. However, consistent with national needs, it was deemed imperative for inflationary control to remain one of the top priorities among targets for global monetary and fiscal policies. Effective inflationary control would mitigate capital flights and ensure that inflationary fire, which is likely to be fueled by surging expenditure on conspicuous consumption products, is doused considerably.