By Dr Eugene Brink
Economics is puzzling to most of us and its concepts seem arcane. Admittedly, an in-depth look at how an economy operates is best left to experts.
For Joe Public, however, illumination of some of the most basic ideas and concepts is useful, instructive and more necessary than ever. Economics affects us, after all, on account of it influencing how much money we have in our pocket, how much we spend, how much we have to repay on our debt or whether we have a job.
One of the most pivotal and basic concepts to grasp is that of inflation. We read about it the media and policymakers keep repeating it. But what exactly does it entail? How is it measured? And how does it affect us?
The South African Reserve Bank (SARB) defines and describes inflation as follows: “Inflation is a process of continual increase in the prices of most goods and services in a country. This does not necessarily mean that all prices increase. There may be some exceptions, such as computer prices that have actually declined in recent years. Inflation can therefore be described as a persistent general increase in prices.”
The BBC corroborates this view and contends that “inflation is the rate of increase in prices for goods and services”.
The SARB says inflation is measured using a basket of goods and services consumed by a “typical” consumer and then keeping track of the cost of that basket over 12 months. “In the 12 months up to January 2017, the cost of that basket rose by 6%. This increase of 6% in the so-called consumer price index (CPI) is referred to as the inflation rate.”
The inflation rates are expressed as percentages. If CPI therefore amounts to 6%, this means that on average, the price of products and services we pay for is 6% higher than a year earlier. Or, we would need to spend 6% more to buy the same things we bought 12 months ago.
Inflation could be a positive or negative trend, but in South Africa it is certainly viewed with a jaundiced eye. In short, inflation currently eats away at the money we as South Africans earn and spend. Of course, it is also used as a guide for salary increases, but inflation also makes things more expensive.
The inflation rate also determines the monetary policy of the SARB and therefore the interest rates, too. If the inflation rate is high and rising, the SARB is likely to hike interest rates; when they are low, stable and falling, they are likely to lower them (like they did in July). The former raises the money we spend on debt, whilst the latter lowers it. These adjustments in the interest rate is also done to protect the value of the Rand – which is a Constitutional obligation.
“Inflation is one of the most important issues in economics. It influences the interest rate we get on our savings and the rate we pay on our mortgages. Inflation also affects the level of pensions and benefits,” says the BBC.
BBC, 2 December 2014, “Q&A: Inflation explained”, https://www.oldmutualfinance.co.za/blog/general/what-is-inflation-and-what-causes-it.
Old Mutual, 2017, “What is inflation and what causes it?”, https://www.oldmutualfinance.co.za/blog/general/what-is-inflation-and-what-causes-it.
SARB, March 2015, “Why is inflation bad?”, https://www.resbank.co.za/Lists/News%20and%20Publications/Attachments/4996/Fact%20Sheet%202.pdf