Determinants of inflation rates in Uganda

Abstract

This study investigates the determinants of inflation rates in Uganda, focusing on the effects of exchange rates, GDP, interest rates, and global commodity prices (specifically crude oil) from 1993 to 2023. Utilizing time-series analysis, the study aims to identify the relationships and causal influences of these variables on inflation. The bivariate analysis reveals significant positive correlations between inflation rates and both the exchange rate (r = 0.599, p = 0.000) and global commodity prices (r = 0.400, p = 0.029). Conversely, GDP shows a negative correlation with inflation (r = -0.112, p = 0.045), suggesting that higher GDP is associated with lower inflation rates. The multivariate regression analysis confirms these findings: exchange rates (Coef. = 0.461, p = 0.000) and global commodity prices (Coef. = 0.082, p = 0.000) have a significant positive impact on inflation, while GDP has a significant negative effect (Coef. = -0.002, p = 0.007). Interest rates, however, do not significantly affect inflation (Coef. = 0.065, p = 0.611). The model explains 65.5% of the variation in inflation (R-squared = 0.655), with an F-test result indicating overall significance (F = 11.875, p = 0.000). Recommendations include stabilizing the exchange rate and managing global commodity prices to mitigate inflationary pressures. These insights are crucial for policymakers in Uganda aiming to enhance economic stability and control inflation.