Ethiopia has experienced persistently elevated inflation since 2018, with the annual headline inflation rate reaching a peak of 34.04% in 2022 before moderating to 13.21% in 2025. This inflationary episode has posed significant challenges to macroeconomic stability, eroding household purchasing power and complicating the conduct of monetary and fiscal policy. The period from 2018 to 2025 was marked by significant structural changes and external shocks, including the transition to a market-determined exchange rate regime in July 2024, global commodity price shocks, and domestic supply disruptions associated with conflict and climatic variability. The study aimed to identify the key drivers of inflation, assess the effectiveness of policy responses, and evaluate the credibility of the policy framework through a multi-method approach combining descriptive analysis, Structural Vector Autoregression (SVAR) estimation, and an expert elicitation survey of Ethiopian Economics Association members.
The descriptive analysis reveals substantial regional heterogeneity in inflation, with Benishangul-Gumuz recording the highest average rate (25.57%) and Somali the lowest (21.24%), while conflict-affected regions and import-dependent urban centers experienced greater price pressures. The composition of inflation also shifted between 2022 and 2025, with food inflation declining from 38.05% to 12.09%, while non-food inflation remained more persistent, falling from 28.35% to 14.99%. This pattern is consistent with lingering effects of exchange rate adjustments and fuel price reforms. The co-movement of global supply-chain pressures, world commodity prices, and domestic inflation further highlights Ethiopia’s exposure to external shocks, with 82.3% of experts identifying oil price spikes as the most significant transmission channel for geopolitical disruptions. Internationally, Ethiopia continued to record higher inflation than regional peers, reaching 13.21% in 2025 compared with 12.48% for Sub-Saharan Africa, 4.07% for Kenya, 3.33% for Tanzania, and 3.58% for Uganda.
The SVAR estimation provides empirical evidence on the dynamic responses of inflation to structural shocks. Inflation is highly persistent in the short run, with own shocks explaining 98.33% of inflation variation at the 1-month horizon. Money supply shocks increase inflation with a lag, peaking at period 4 with a response of 0.512, and explain 18.19% of inflation variation at the 12-month horizon, suggesting that monetary conditions matter, although transmission operates with a lag of approximately 3–4 months. Exchange rate shocks have a positive effect during the first three months, but the response is not statistically significant, indicating weak or delayed pass-through. Energy price shocks have no significant direct effect and explain less than 1% of inflation variation at all horizons, suggesting that their effects may operate indirectly through exchange-rate and other channels. Historical decomposition shows that inflation’s own shocks constitute the most important source of fluctuations, followed by money supply shocks, while exchange rate shocks became more prominent during 2024, coinciding with the transition to a market-determined exchange rate regime.
The expert elicitation survey indicates substantial concerns about the credibility of the policy framework. A significant perception gap exists regarding current inflation levels, with 25.6% of respondents estimating inflation at 35% or above, while only 1.9% estimate it below 10%; this gap is also systematically related to professional affiliation. Experts rank exchange rate reform and Birr depreciation as the most important driver (mean 3.31; 83.5% Major/Dominant), followed by domestic supply shocks (mean 3.03; 73.1%) and global commodity prices (mean 2.91; 68.8%), while fiscal and monetary expansion rank lower. These responses indicate that experts predominantly perceive inflation as structural and supplydriven. Concerns about policy credibility are also substantial: 70.7% of respondents believe confidence in the Birr has worsened since the reforms, 52.3% perceive the NBE as lacking independence, and 57.2% consider official CPI figures unreliable, with 71.4% citing political or institutional pressure as a concern. Forward-looking expectations are similarly pessimistic, with 55.6% anticipating further increases in inflation and 72.1% reporting a more pessimistic outlook than six months earlier. Moreover, 60.9% of respondents rate the NBE’s commitment to achieving single-digit inflation as having low or very low credibility.
Taken together, the findings suggest that Ethiopia’s inflation dynamics are strongly influenced by structural and supply-side factors rather than solely by demand-side pressures. At the same time, weak monetary transmission and persistent concerns about policy credibility may limit the effectiveness of monetary policy in containing inflation. Although the current disinflationary trend is encouraging, it remains vulnerable to external shocks, domestic disruptions, and policy reversals. Addressing inflation therefore requires a comprehensive approach that combines effective monetary policy with structural reforms, supply-side interventions, institutional strengthening, and credible policy implementation.
Based on these findings, the report recommends strengthening statistical credibility through independent methodological reviews and transparent data policies; enhancing monetary policy effectiveness through interest rate-based frameworks and improved communication; addressing structural constraints through agricultural investment and logistical improvements; sustaining exchange rate reforms while narrowing the official-parallel market gap; pursuing credible fiscal consolidation; managing external vulnerabilities through strategic reserves and regional cooperation; improving monetary-fiscal coordination; addressing political economy constraints through sustained reform commitment; and strengthening inflation monitoring and future research. Effective implementation will require sustained policy commitment, stronger institutions, stakeholder engagement, and international cooperation to achieve lasting price stability and protect household purchasing power in Ethiopia.
