Inflation: 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

CPI: 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.

• 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 inflation: total demand for goods and services exceeds total supply.

Cost-push inflation: due to increases in the costs of factors of production, such wages & raw materials.

Stagflation: 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

Hyperinflation: extravagant and unrestrained general price increases in excess of 50% per month.
650 million googol per cent
6,5 × 10 108 per cent or 65 followed by 107 zeros

government creates money to pay for its expenses causes further acceleration in prices.
currency loses its real value very quickly people quickly spend whatever they receive as the value decreases prices increase dramatically

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

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

Negative impact on economic growth.
Discourages savings & investments
Real value of money and savings decreases
5% interest - 8% inflation rate = real rate of interest of –3%.
Balance of payments
Prices of exported goods increase & imported goods decrease
Loss of export competitiveness → unemployment.

Low-income groups more affected
• No assets that to rise faster than inflation
• poor wage bargaining power
Higher wage demands cause producers to increase their prices to maintain their profits…

Volatility of inflation not good for investment
Higher than EU & USA therefore SA’s prices rise faster than trading partners ↓ competitiveness.

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.

 Adopted in 2000
 Inflation target set MPC (Gill and Pravin)
 3% - 6%
 SARB committed to achieve this
 Policy instrument = repo rate
 MPC meets every 3 months – public information
 Accountable to parliament