inflation: a sustained rise in the general level of prices of goods and service over a period of...
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InflationInflation: a sustained rise in the general level of prices of goods and service over a period of time.
Erodes the purchasing power of consumers.
Calculation using a price index. • CPI• PPI
Measures of InflationCPI: measures changes in consumer prices. Headline rate of inflation.
CPIX: CPI - interest rates on mortgage bonds.
PPI: consists of a ‘basket’ of local, exported and imported goods.
Shortcomings of price indices
• No ‘average household’ • Selection of goods/services not always
representative of entire population. • Weighting may not be accurate • Random sampling may not represent
population as a whole.
Demand-Pull InflationDemand-pull inflation: total demand for goods and services exceeds total supply.
Cost-push inflationCost-push inflation: due to increases in the costs of factors of production, such wages & raw materials.
StagflationStagflation: persistent high inflation, a slowing economic growth rate and high unemployment.
Difficult for economic policy because:• to lower inflation (↑ IR’s) → higher
unemployment• increasing employment → higher inflation
HyperinflationHyperinflation: extravagant and unrestrained general price increases in excess of 50% per month.
650 million googol per cent6,5 × 10 108 per cent or 65 followed by 107 zeros
government creates money to pay for its
expenses
currency loses its real value very quickly
prices increase dramatically
people quickly spend whatever they receive as
the value decreases
causes further acceleration in
prices.
Causes of demand-pull inflation
Cause by factors that ↑ C, I, G (X-M)
Moneterists: ↑ in money supply main cause
Keynsians: Inability of increase output to meet the increased demand
Causes of cost-push inflation
Caused by increase in…• Imported raw materials and capital equipment
(weak rand)• price of oil • Increased labour costs (wage increases >
productivity increases• Rise in interest rates • Increase in taxes
The consequences of inflationNegative impact on economic growth.Discourages savings & investments
Real value of money and savings decreases5% interest - 8% inflation rate = real rate of interest of –3%.
Balance of paymentsPrices of exported goods increase & imported goods decreaseLoss of export competitiveness → unemployment.
Redistribution of income in a countryLow-income groups more affected • No assets that to rise faster than inflation• poor wage bargaining power
Causes further inflationHigher wage demands cause producers to increase their prices to maintain their profits…
Problems…Volatility of inflation not good for investment
Higher than EU & USA therefore SA’s prices rise faster than trading partners ↓ competitiveness.
Measures to combat inflation
Dealing with demand-pull inflation
Restrictive fiscal policy ↑ taxes ↓ gov spending
Restrictive monetary policy ↑ interest rates
Dealing with cost-push inflation• compulsory measures to contain wage and
price increases.• polices aimed at increasing productivity
– tax rebates/subsidies for workplace education & technology.
Inflation targetingAdopted in 2000 Inflation target set MPC (Gill and Pravin)3% - 6%SARB committed to achieve thisPolicy instrument = repo rateMPC meets every 3 months – public
informationAccountable to parliament