Why Prices Keep Rising Even When the Birr Stabilizes
A steadier exchange rate can ease new cost pressure without bringing prices back down. Here is why household costs may keep rising and what else to watch.
A steady exchange rate does not reset the price level
A steadier Birr would slow one source of new price pressure, but it would not take prices back to where they were before. If an importer now pays 150 Birr for a dollar instead of 100, holding at 150 prevents another exchange-rate jump. It does not restore the old import cost.
That distinction is easy to miss. A stable rate gives businesses a more predictable cost for their next order. The Birr cost of that order can still be much higher than it was before the currency moved.
Slower inflation still means prices are rising
Inflation measures how quickly prices rise over time. When the rate of inflation falls, prices usually keep increasing, just at a slower pace. Prices need to fall for the cost of a household basket to return to an earlier level.
For example, imagine groceries cost 10,000 Birr. A 20% increase takes the basket to 12,000 Birr. If prices then rise by another 10%, it costs 13,200 Birr. Inflation has slowed from 20% to 10%, but the basket still costs more than before. These figures are only an illustration, not Ethiopia’s measured inflation rate.
Old stock and long contracts can delay the effect
Goods in a shop may have been ordered months earlier. Their cost can include the exchange rate on the order date, shipping, insurance, storage and the cost of borrowing while the shipment was in transit. A business still selling that stock may price around what it paid, even if the exchange rate has since steadied.
The reverse can happen too. A retailer holding stock bought at a lower cost may delay a price increase. When a business changes its prices depends on its inventory, contracts, cash flow and competition. The exchange rate can move first; shoppers may see the effect later.
Many costs move without the exchange rate
An imported product has two separate cost pressures: the price charged by the overseas supplier and the exchange rate used to pay that bill. If a supplier raises a $100 item to $110 while the rate stays at 150 Birr per dollar, its cost before freight and tax rises from 15,000 to 16,500 Birr.
Local costs can change as well. Fuel, repairs and transport affect the price of food grown in Ethiopia as much as imported goods. Wages and rent may be renegotiated only once or twice a year. Taxes, electricity tariffs and other administered prices can follow their own policy schedules. Weather, harvests and road conditions also affect what reaches markets and what it costs.
Different products respond at different times
A shop that has cheaper replacement stock may lower its price quickly, especially if nearby competitors are doing the same. Another shop may hold its price to recover earlier costs or repay a loan. Products with few sellers may face less pressure to pass savings on than goods shoppers can easily buy elsewhere.
Food prices have their own timing. A good harvest can increase supply and ease prices in one season, while a poor harvest or expensive transport can push them up. That is why the exchange rate alone cannot explain the price of teff, vegetables or cooking oil in a particular market.
What to watch alongside the Birr
The exchange rate helps explain the cost of imports and imported materials, but it cannot tell you what will happen to every household bill. Look at monthly inflation as well as separate food and non-food price trends. Fuel, transport and electricity costs can add pressure even when the currency is moving less.
Our [guide to inflation and the Birr](/business/how-does-inflation-affect-the-exchange-rate) explains how inflation and exchange rates affect each other. The question here is narrower: even if the Birr steadies, prices can keep rising while earlier costs and other pressures work their way through the economy.