Recommendations
High Inflation
How do we deal with high inflation?
➀ Adjust frequencies for regular revisions of key documents
All your documents that include price points should already be factoring an inflation forecast (see below on preparing for high inflation). In environments with low and stable inflation rates, our standard practice is more or less to conduct annual review and revision procedures of such documents. But as inflation escalates, the frequency of reviewing and adjusting our inflation assumptions should also increase. This is crucial because any miscalculations can significantly impact our budget. As a rule of thumb, when you expect low inflation rates (year-on-year inflation of 5% or less) annual review procedures are appropriate. For medium inflation rates (yoy inflation between 5 and 15%), you should your assumptions quarterly and make adjustments if needed. When you expect high inflation rates (yoy inflation above 15%), you should plan on a monthly check that your previsions are still somewhat relevant and accurate.
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➁ Define triggers for ad hoc revisions of key documents
Rapid surges in inflation can quickly render your inflation adjustments obsolete. Therefore, it's essential to establish a monitoring mechanism that activates ad hoc revisions when inflation deviates significantly from your projections. As a general guideline, if the inflation rate diverges by +/- 15% from your expected rate, it should prompt an immediate ad hoc revision. This ensures that your comparison between planned and actual costs remain effective and responsive to real-time economic conditions. In practice, this means that if you've forecasted an inflation rate of 20% on average for the upcoming year, you would set up a monitoring mechanism such that if the actual rate rises above 23% or drops below 17%, this would trigger an immediate ad hoc revision and adjustments of all documents where the initial projection of 20% was used.
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➂ Consider giving a bigger weight to socio-economic considerations in your targeting
High inflation will not substantially change the nature of vulnerabilities, but it will increase both the severity of existing needs and the levels of needs in general. It will also tend to have a different effect in the very short term and in the medium and long term. At first, it affects most the levels of needs, with a larger portion of the general population at risk of falling into poverty. But ultimately, high inflation affects the poor the most, and it is those who were already vulnerable that end up even more strained. You can thus adapt your targeting criteria to better reflect economic vulnerabilities. You can also plan on having a phased approach to household targeting, by focusing on broader coverage at first to include economically at-risk populations and on narrower poverty-based targeting over time.
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➃ Adapt the frequency of transfers to your payment objectives
When the objective of a transfer is to provide a safety net for regular expenses, and as such to help people smooth their consumption over time, then you can help them do so with more frequent, smaller disbursements. In a context of high inflation, this will provide recipients with the ability to better forecast regular income and better plan their expenditures. In practice, with low and steady inflation rates, we typically have monthly transfers for safety nets. But with high inflation, bi-monthly transfers can be more adapted. By contrast, if you want your transfer to enable investments, or larger exceptional expenditures such as asset replacements, then consider bulking or front-loading payments instead. The same amount in local currency will have more value to recipients and greater purchasing power when received earlier in time. In practice, it could be feasible in some cases to provide two-month worth of transfer value at once, providing that ad hoc additional Do No Harm analysis confirms that higher transfer sizes do not generate additional risks. This reasoning applies to programmatic payments and in particular cash components depending on the objective of the intervention. It also applies to operational payments: frontloaded or bulked payments can be advantageous to suppliers, service providers, other partners, or even staff.
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➄ Review your decisions over what to procure locally or internationally
High real inflation may change the results of past cost-analysis in terms of what to procure locally or internationally in the first place. And in high inflation contexts programmatic considerations should also enter in the decision to procure locally versus internationally, in addition to purely cost-based considerations. This is because the decision to procure internationally could result in further fuelling local inflation, whereas the decision to procure locally can be built into positive programmatic outcomes. This is in particular the case if inflation is driven by real rigidities on local marketplaces or within broader value chains and markets systems (e.g. higher transportation or production costs during a conflict or following a natural disaster).
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✚ Make sure you have also considered and adequately put in place the actions in the box below, which are meant to prepare you for high inflation contexts in the first place!
How do we prepare for high inflation?
If you are worried that your context could devolve into high inflation in the future, consider putting in place some of the following actions as preparedness measures.
➊ Forecast inflation in budgets, contracts & transfer sizes, etc
In all documents that include prices or values, you need to take into account not just the current price point at the time the document is drafted (and in whichever currency the document is specified in), but also the anticipated inflation rate over the duration for which the document is relevant (e.g. the implementation period for a program document, the grant cycle for a budget, the contract duration for a procurement process, etc). This principle is critical for budget planning, procurement processes, Bills of Quantities (BoQs), and all contracts — whether with suppliers, service providers, or other partners. Similarly, this principle applies to programmatic payments such as cash components as well as other operational payments such as the salaries for our staff, although other considerations may also come into play. For example, note that for determining the value of a cash component, coordination is more important than relevance, as tensions may arise if transfer values are not harmonized across actors working in the same areas.
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➋ Start monitoring prices in your areas of intervention consistently
If you expect future high inflation, you should start monitoring the price of the (S)MEB in local marketplaces within our areas of operation on a monthly basis. This will allow you to pick up on whether local inflation trends differ significantly from general ones. When documenting these prices, it is also essential to actually record both the price in local currency and its equivalent in the hard currency of reference each time. This dual recording makes it easy to track whether inflation is mostly nominal or real. You can also use the analysis of (S)MEB prices disaggregated to pick up upon commodities and services that experience different inflation rates and adapt accordingly.
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➌ Explore opportunities for programming financial inclusion components around access to savings
Savings can be a critical tool for affected population to build their resilience and increase their self-reliance in times of high inflation. In anticipation for high inflation, it could be very valuable to build into your programming more financial inclusion components aimed at facilitating savings. This can include for example raising awareness on adequate household-level saving practices, identifying relevant ways for various profiles of individuals in the population to store value, or building the groups and social networks upon which collective saving practices may depend.
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