Inflation:

1) Explain the concept of inflation and how it is calculated

The inflation rate tells us by what percentage the average price level in the country changed. A positive inflation
rate tells us that there was a general price increase in the country, while a negative inflation rate (also called
deflation) tells us that that there was a general price decrease.

So, to calculate the inflation rate we must work out the percentage change in the average price level. This price
level is given to us by the CPI (Consumer Price Index). CPI is measured by taking a typical basket of goods for the
average consumer and monitoring the change in price for this basket over time.

Difference in CPI x 100 = New CPI - Old CPI x 100

Old Value of CPI 1 Old CPI 1

2) Calculate the inflation rate

Unprocessed meat Price in Jul 2019 Price in April 2020 Percentage change
Pork chops per kg R65.05 R69.25 6.45%
Lamb per kg R93.45 R101.50 8.61%
Chicken per kg R73.80 R72.50 -1.76%

3) Discuss the different types of inflation

Supply chain showing relationship between PPI and CPI

labour

resources Production Final product Wholesaler /

Retailer
(FYI see PMI)

FOPS INPUTS PPI PPI OUTPUT CPI

PPI is a leading indicator for CPI as you can see in the supply chain above. The Producers will first see a change in
price in the PPI before we will experience the change in CPI.

PPI price changes can be because of wage rate changes, exchange rates or electricity prices, any factor inputs really.

Interestingly they can measure the price of inputs before they start with production and then again after production,
this tells them where the inflation happened.

Headline inflation: as determined using the CPI.

CPIX inflation: excludes mortgage bond interest rates.

Core inflation: excludes items that have highly volatile prices and items that are affected by government
intervention and policy. E.g. of excluded items are fresh and frozen meat and fish, VAT, etc.

Administered prices inflation: prices of goods and services that are set by government or controlled by government
appointed authorities.

Stagflation: A country persistently suffers from high inflation and high unemployment and low eco growth.

Hyperinflation: Extremely rapid and substantial changes in the overall level of prices. 50% per month.

Deflation: General Price level fall – opposite of inflation. Negative inflation rate. (see price of Chicken above)

Disinflation: which is a reduction in the rate of inflation. E.g. 7%, 5%, 4% (prices still increase, just at a lower rate)
 4) Discuss demand pull and cost push reasons and causes of inflation More money chasing fewer goods.
Demand-pull inflation

The demand for goods and services increases and production remains the same or does not increase as fast. The
excess demand results in prices being “pulled up”.
Causes:
Greater spending by households (C) (Also because credit has become more readily available).
Investment spending by firms increases as a result of a drop-in interest rates and/ or a positive business climate (I).
Increased government spending (G). G&S
Higher earnings from exports (X). More money

Cost-push inflation

Caused by an increase in the cost of production. Increased costs “push up” the price level.
Eg. Businesses that import raw materials and capital equipment.
Weaker exchange rates will cause prices of imports to rise.
Businesses pass on these costs to consumers.
If there is an increase in the cost of producing a product, there will automatically be an increase in the selling price of
the product.
If cost rises, price rises!!
If there is a demand for higher wages or salaries, it will lead to an increase in the prices of goods and services.
Salaries and wages fall under input costs in a business and form part of the cost price of a product.
Causes:
Wages (increases in wages and salaries). - CAUSES OF INFLATION
Increase in price of key imported inputs. - Increase in the money supply.
Exchange rate depreciation. - Increase in the input costs.
Increase in profit margins. - Market failure.
Decrease in productivity for the same remuneration. - Imported inflation.
Natural disasters. - Weaker exchange rate.
- Decline in productivity.
5) Explain the consequences of inflation. - Trade unions.

- CONSEQUENCES OF INFLATION
- Inflation impacts negatively on economic growth.
- Inflation brings about uncertainty in the economy. Weakens our exchange rate.
- Savings and investment are discouraged. PPP (Buying power)
- Inflation affects the distribution of income.
- Redistributes income from people with fixed incomes to those with flexible incomes.
- Redistributes income from private individuals to the government.

6) Evaluate how monetary and fiscal policy can be used to curb inflation
- See notes on contractionary and expansionary.

7) Evaluate the use of inflation targeting in South Africa

South Africa’s inflation target is 3%-6%. This means the government will not interfere if inflation is within the target
range. If the inflation we experience (CPI) is above 6% then the government is likely to use monetary policy to curb
spending by increasing Interest rates so that disposable income is less and this will hopefully decrease consumer
spending to lower inflation.
We still prefer a lower expected inflation rate too deflation because deflation means the general price level is
decreasing which will cause consumers to stop spending. Pensions will decrease and income increases will become
income decreases.