ECONOMICS 214
TOPIC 1: CAUSES AND CONSEQUENCES OF INFLATION
CADE MARTIN CROY
23573791
26 APRIL 2021
1. INTRODUCTION
Inflation can be defined as a consistent rise in the general level of prices. This is normally
measured by the constant changes in consumer price index (CPI) which is based on the
weighted basket of goods and services and the average price paid for that basket. (M. Botha,
2005). This serves as an important key factor to determine the country’s economic strength
and begins to impact the economy on a wider spectrum influencing returns of monetary value
which results in various investments becoming more volatile depending on how severe the
impact of inflation is over a given period. This essay will therefore discuss the causes and
consequences of cost-push inflation and the impact it has over the South African economy.
2. COST-PUSH INFLATION
Inflation targeting was formally introduced in South Africa in February 2000. The SA
Reserve Bank’s objective is to control inflation rates between three to six percent which has
been successful as the inflation rate has fluctuated in the past few years, varying between
4.13% and 6.3% as indicated in Table 1 (O'Neill, n.d.). South Africa deals with two types of
inflation, mainly Cost-push and Demand-pull inflation.
With more emphasis on cost-push inflation, this refers to where input costs of manufacturing
items pushes up the selling prices of the respective final goods and services. (Insights, 2017).
An example of this is the high petrol prices that the economy is currently experiencing where
prices have risen from January to April by R2,41c and R2,46c respectively for Unleaded 93
and 95 fuels. Based on Table 2, the unfortunate spike in petroleum prices not only has
negative consequences on motorists, but towards the whole country. This has resulted from
the immense impact of the world pandemic, Covid-19, which led to economic decline over
several sectors and severe additional damages towards household budgets both (Writer,
2021).
2.1 Causes of cost-push inflation
Inflation is determined by supply-side factors and can lead to lower economic growth and
often causes a fall in living standards as it limits spending power. These factors vary from
labour, capital, land and entrepreneurship. Demand for goods and services must be stationary
or inelastic. The way to understand the cause of this is similar to the process of a food cycle.
For company growth and sustainability, companies cannot maintain its profit margins by
producing the same amount of goods and services as costs begin to increase for example, raw
materials and cost of labour (Hall, 2021).
With increased costs on the price of commodities such as grain, oil etc. come additional tax
being added in order to cover higher fuel and energy costs forcing companies to compensate
for these additional expenses. Referring to Table 2, the increase in oil prices leads to higher
petrol prices which then influences transport costs. (Pettinger, 2019). This could lead to
wages decreasing due to the higher prices of fuel, but could be avoided by implementing
fiscal policy which offers higher taxes and lower spending. With South Africa being an
emerging or developing country, food inflation tends to play a bigger role as the increase of
costs are passed onto the consumers causing rises in general price level and thus inflation.
2.2 Effects of cost-push inflation
Cost-push Inflation is categorized by the rising of prices and the fall of Gross Domestic
Product (GDP). A falling GDP indicates a weakening production level of the economy
(Thakur, n.d.). As prices of goods and services begin to rise, the cost of living, cost of doing
business, investments and negotiations are put under pressure which negatively affects the
economy forcing it into further economic decline.
This also impacts employment as the decline of GDP leads to decreasing demand of goods
and services and requires companies to lay off workers and therefore increases the
unemployment rate and as such results in the fall of living standards.
3. CONCLUSION
When an economy grows as a result of increased spending, the effect is seen in the inflation
rate. The value of the currency (ZAR) is thus worth less than what it was previously. Ways to
limit the impact of inflation could be implementing a deflationary fiscal policy for example
higher taxes and lower government spending. The problem with using higher interest rates is
that although it will reduce inflation, it could lead to a big fall in GDP. A better long-term
solution can be an implementation of improved supply-side policies to increase productivity
and growth of the economy. The down side to this solution is that such policies could take a
long time to have any effect. SA Reserve Bank governor, Lesetja Kganyago, continues with
the strategy that low inflation rate is key to recovery of the economy and to maintain foreign
capital flows to South Africa.
(787 words)
4. REFERENCING LIST AND ADDITIONAL ADDENDUMS
References
Hall, M., 2021. Investopedia. [Online]
Available at: https://www.investopedia.com/articles/05/012005.asp
[Accessed 23 April 2021].
Insights, S. A. M., 2017. Few groups main drivers of South Africa's inflation. [Online]
Available at: https://www.southafricanmi.com/blog12jul2017.html#:~:text=%22Cost%20Push%20Inflation%22%20%3A%20This,outside%20the%20contr
ol%20of%20consumers.
[Accessed 23 April 2021].
M. Botha, A. B. W. G. L. R., 2005. Inflation. In: C. Esnouf, ed. The South African Financial Planning
Handbook. Durban: LexisNexis Butterworths, p. 234.
O'Neill, A., n.d. South Africa: Inflation rate from 1985 to 2025. [Online]
Available at: https://www.statista.com/statistics/370515/inflation-rate-in-south-africa/
[Accessed 23 April 2021].
Pettinger, T., 2019. Economics.help. [Online]
Available at: https://www.economicshelp.org/blog/2006/economics/cost-push-inflation-2/
[Accessed 23 April 2021].
Thakur, M., n.d. WallStreetMojo. [Online]
Available at: https://www.wallstreetmojo.com/cost-push-inflation/
[Accessed 23 April 2021].
Writer, S., 2021. Expect record high petrol prices in South Africa next week. [Online]
Available at: https://businesstech.co.za/news/energy/479681/expect-record-high-petrol-prices-insouth-africa-next-week/
[Accessed 23 April 2021].
Table 1: Inflation rates
Inflation rate (%)
Year
3.88
2021*
3.34
2020
4.13
2019
4.62
2018
5.27
2017
6.34
2016
4.58
2015
(source: statista.com)
Table 2: Recent petrol prices
Petrol Unleaded 93 (Rands)
Petrol Unleaded 95 (Rands)
Date
R14.69
R14.86
06-01-2021
R15.50
R15.67
03-02-2021
R16.15
R16.32
03-03-2021
R17.10
R17.32
07-04-2021
(source: aa.co.za)