The Drivers of Inflation Dynamics during the Pandemic in Rwanda: Evidence from Disaggregated Consumption Data

Abstract

This research seeks to examine the behavior and/or dynamics of inflation during the pandemic, using monthly disaggregated consumption data for Rwanda covering the period 2005 to 2021. This article specifically examines the dynamics of inflation during the pandemic and the effect of consumption on these patterns. The study used the Sum of Autoregressive Coefficients (SARC), estimated using the ADF method as in Andrews and Chen (1994) as well as the Grid bootstrap method as in Hansen (1999), to measure inflation persistence. Inflation persistence helps to show how the pandemic shock affects different components of CPI and overall inflation and how long it takes for this shock to dissipate. The results show that inflation persistence before the pandemic is generally high compared to inflation persistence during the COVID-19 pandemic. However, the persistence of headline inflation is higher compared to other groups of inflation, mainly driven by the persistence of inflation for volatile CPI components. Thus, the Central Bank should always monitor movements in the inflation of these volatile components, especially during shocks similar to the pandemic.