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The Illusion of Disinflation: Why Ethiopia’s Reported 10% Inflation Amid the Birr’s Plunge Defies Economic Gravity

December 11, 2025


The author (file)

Teshome Abebe

https://borkena.com/2025/12/11/the-illu ... e_vignette

In a nation grappling with the aftershocks of sweeping macroeconomic reforms, official statistics paint a picture of improbable tranquility. According to reports from Addis Standard and corroborated by the Ethiopian Statistics Service, the country’s annual inflation rate dipped to 10.9% in November 2025—the lowest since February 2019—down from 11.7% in October and a projected stabilization around 10% for the 2025/26 fiscal year. This comes even as the Ethiopian birr, the local currency, has lurched into freefall, depreciating over 200% against the U.S. dollar since its market liberalization in mid-2024, with exchange rates surging from around 57 birr per dollar to peaks of 177 birr per dollar in late November 2025 before a slight retreat to approximately 155 birr by early December. On the surface, this narrative of cooling prices amid a currency cataclysm might seem like a triumph of policy ingenuity. But a contrarian lens reveals it as economically near-impossible—a statistical mirage that buckles under the weight of basic monetary theory, Ethiopia’s structural frailties, and historical precedents. This executive-in-mind essay contends that such a decoupling of currency depreciation from inflationary pressures is not just unlikely; it borders on the implausible, likely masking deeper distortions in data reporting or unacknowledged economic tremors.

The Iron Law of Exchange Rate Pass-Through: Depreciation as Inflation’s Silent Accelerator

At the heart of this disbelief lies a foundational economic principle: currency depreciation inexorably transmits upward pressure on domestic prices through the mechanism of exchange rate pass-through (ERPT). In simple terms, when a currency like the birr weakens, imports—priced in stronger foreign currencies such as the dollar—become costlier in local terms. This cost escalation ripples through supply chains, elevating wholesale and retail prices for everything from fuel to consumer goods. Empirical studies on Ethiopia underscore this linkage with stark clarity. Research spanning 1975 to 2020 demonstrates a significant ERPT coefficient, where a 10% depreciation in the birr correlates with a 2-4% rise in consumer price inflation within quarters, driven primarily by imported intermediates. Another analysis of quarterly data from 1990 to 2016 confirms that exchange rate volatility accounts for up to 30% of inflation variance in Ethiopia, a figure amplified in low-reserve, high-import economies.

Why does this matter for Ethiopia’s 2025 anomaly? The birr’s plunge—exacerbated by forex market liberalization and persistent dollar shortages—represents not a gentle drift but a violent shock. From August 2025 alone, the currency depreciated over 50% in mere months, pushing import costs (priced in dollar) skyward at a time when global commodity prices for oil and fertilizers remain elevated. In theory, this should ignite imported inflation, not quench it. Yet official figures claim a disinflationary trend, with headline Consumer Price Index (CPI) easing for six consecutive months. Economists might invoke

incomplete pass-through

due to sticky prices or hedging, but in Ethiopia’s fragmented markets—where informal trade dominates and price controls are lax—these buffers are illusory.

The math doesn’t add up: a currency halved in value should halve purchasing power for imports, fueling at least a proportional inflationary spike. Claiming the opposite isn’t economics; it’s alchemy.

Ethiopia’s Import Trap: A Powder Keg of Vulnerability

Compounding the theoretical improbability is Ethiopia’s acute dependence on foreign goods, which transforms birr weakness into a direct assault on living costs. While recent headlines celebrate wheat self-sufficiency—declaring an

end to import dependency

with domestic production hitting record highs in November 2025—this victory is narrowly scoped and recent, leaving gaping exposures elsewhere.

Fuel imports, for instance, constitute over 20% of Ethiopia’s total import bill, with the nation importing nearly all refined petroleum. Fertilizers, critical for agriculture, follow suit, (though there is plan underway to produce some at home) with import reliance hovering at 70-80% amid global supply chain snarls. Even as wheat imports wane, the broader import-to-GDP ratio lingers around 25-30%, underscoring an economy still tethered to external inputs and imports priced in dollar.

In 2025, this trap snapped shut. The birr’s depreciation inflated fuel prices by over 100% year-on-year, cascading into transportation and food processing costs—staples that weigh heavily in Ethiopia’s Consumer Price Index (CPI) basket (food alone accounts for 35%). Limited but available household surveys, diverging from official tallies, report surging outlays for rent, utilities, and staples, suggesting the 10.9% figure captures aggregate averages that obscure urban-rural and informal-sector realities. If depreciation doesn’t stoke inflation here, where imported essentials (priced in dollar) dominate consumption, then the pass-through coefficient must be zero—a statistical unicorn unsupported by Ethiopia’s own reported econometric models. The contrarian truth: without a miraculous surge in export revenues or aid inflows to offset these costs (neither of which materialized in late 2025 with the exception of coffee and gold exports), falling inflation amid such depreciation is akin to claiming drought has greened the fields.

Echoes of History: Devaluation’s Bloody Trail in Ethiopia’s Past

My own skepticism hardens when viewed through the prism of Ethiopia’s devaluation history, where currency plunges have reliably birthed inflationary infernos. The 2017-birr devaluation— a modest 15% adjustment amid forex strains—triggered a 20%+ inflation surge within a year, as imported inflation eroded wage gains and sparked social unrest. Fast-forward to 2024: the shift to a floating rate saw the birr halve in value almost overnight, propelling headline inflation above 30% by mid-year before a partial taper to 17% by December. Economists, including this one, at the time warned of persistent passthrough, with Price WaterHouse Coopers (PwC) forecasting

far-reaching implications for inflation

due to import reliance (priced in dollar).

Yet here we are in 2025, with the birr lunging even further (another 50-70% depreciation post-stabilization), and officials heralding sub-11% inflation as reform’s dividend.

This pattern isn’t coincidence; it’s causation. Time-series analyses from 1991-2020 reveal a Granger causality running from exchange rate shocks to inflation, with lags of 3-6 months allowing initial spikes to embed. In 2025, the birr’s November peak at 177 per dollar should, by economic logic, presage December’s Consumer Price Index (CPI) readings with fresh upward momentum—not the serene 10.9% print. Dismissing this as

reform maturation

ignores the scale: prior tapers followed base effects from hyperinflation, not concurrent currency hemorrhaging.

History whispers—or rather, shouts—that Ethiopia’s devaluations are inflation’s midwives, not its morticians. To argue otherwise requires rewriting the ledger.

Unmasking the Anomaly: Data Shadows and the Illusion of Control

Peering deeper, the contrarian case uncovers fissures in the data itself, hinting at methodological sleights or suppressed lags. Official CPI relies on fixed baskets that may underweight volatile imports, while black-market exchange rates—often 20-30% above official—better reflect lived depreciation. Moreover, the disinflation coincides with aggressive monetary tightening (repo rates hiked to 15%) and fiscal austerity, tools that blunt but cannot negate ERPT in an open economy. Lagged effects, too, loom: November’s 10.9% may precede a rebound as November’s birr lunge filters through December supply chains.

Yet even granting these caveats, the simultaneity strains credulity. Global parallels—Turkey’s lira crisis or Argentina’s peso woes—show depreciation devouring disinflationary gains. Ethiopia, with shallower reserves (three months’ supply) and higher informality, should fare worse, not better. The Addis Standard’s credulity in reporting this as unalloyed good news belies the risk: if true, it implies a productivity miracle or external windfall absent from balance-of-payments data. More plausibly, it’s a fragile facade, propped by underreported costs or optimistic projections.

To summarize then, Ethiopia’s purported plunge to 10% inflation amid the birr’s unrelenting depreciation is not a policy win but an economic enigma—nearly impossible under scrutiny of theory, structure, and precedent. It invites not celebration but investigation: Are figures fudged? Effects merely deferred? Whatever the veil, lifting it reveals a nation still chained to depreciation’s inflationary whip. Policymakers and observers alike must demand transparency, lest this “disinflation” prove as evanescent as the birr’s value. In economics, as in physics, gravity—here, the pull of passthrough—cannot be so casually repealed.

Teshome Abebe, PH.D., a former Provost and Vice President for Academic Affairs at two institutions, is currently Professor of Economics and Faculty Laureate.