What is inflation?

What is inflation?

Every year prices of basic goods and services tend to increase. Comments such as: “In my day a loaf of bread cost R1.00. Now I can’t even buy half a loaf for the same price!” are often heard. This phenomenon is known as headline inflation.

What is inflation?

Inflation is a process of continuous increase in the price of most goods and services in a country. This does not necessarily mean that all prices increase. There are some goods, like computers, which have actually dropped in price. Inflation can therefore be described as persistent general; increase in prices. Inflation is usually given as the percentage increase in overall prices over a year.

Inflation eats away at the value of people’s money. With the same amount of money, fewer goods can be bought than before. Therefore it can be said that one’s money is devaluating as inflation increases. Inflation is considered bad for the economy and for the general public. Some inflation however is considered normal for any country.

How do we measure inflation?

Defining a basket of goods and services used by a “typical” customer and then keeping track of the cost of the basket, is the measure of inflation. In the twelve months up to January 2007, the cost of the basket rose by 10% (as an example). This increase of 10% in the so called consumer price index (CPI) is referred to as the inflation rate. The CPI is the average spending or living costs of a person.

What causes inflation?

A wide range of factors causes inflation. The most common causes are:

  • An increase in the demand for goods due to shortage, which leads to prices going up (known as demand inflation). If there are 100 consumers wanting to buy coffee, but only 90 bottles of coffee are available, the consumers will push up the price
  • Certain conditions, like increases in production charges, causes prices charged on goods to increase (known as push inflation). When production prices rise it will cause the producer to pass on the higher prices to the consumer in order to stay in business. Such factors include the exchange rate, oil price and wages and salaries. Unfortunately in South Africa we are unable to produce most goods, and we need to import some goods. A higher petrol price has both a direct and indirect impact on the general price level, as it not only impacts on the price we pay for petrol, but also on the whole range of goods and services that are subject to transport costs