UNDERSTANDING THE IMPLICATION OF CHANGING LEVELS OF INFLATION ON STANDARD OF LIVING IN GHANA

ABSTRACT This paper explains how standard of living in Ghana is affected as inflation changes from time to time. The need for such understanding has become relevant considering the dramatic fluctuations of inflation in Ghana especially in 2012. Additionally, inflation happens to be one of the most keenly discussed indicators in Ghana even though it is not clear whether its meaning is not lost on those who love to talk about it. Furthermore, available literature does not only lack context-specific studies for Ghana; the literature also fails to agree on a common conclusion on the subject Real GDP per capita and Human Development Index are used as indicators of standard of living. Employing a quantitative framework, the research uses regression and sensitivity analyses to explain the theoretical relationship between inflation and standard of living in Ghana, as well as determine the sensitivity of standard of living to inflation. Using data for the period of 1980-2012 mostly obtained from the World Databank, the analyses performed establish that there is a significant negative statistical relationship between inflation and standard of living in Ghana. However, Inflation accounts for only a portion of changes in standard of living. This paper also proves that standard of living increases in sensitivity to inflation as inflation rate rises. The study asserts that it is important to maintain a low stable rate of inflation in Ghana. The study also recommends indexation of salaries to prevent social problems such as strike actions. Furthermore, it highlights the need to make more public other indicators such as unemployment and poverty to give a better indication of the welfare of Ghanaians. With regards to further research, the study advises the use of other determinants of welfare to identify other factors that affect standard of living, and the use of primary data to determine the applicability of the theory established to reality