1.4 Inflation

Economic and management sciences

Grade 8

Economic cycle

Module 5

Inflation

Assessment standard 1.5:

Inflation

WHEN YOU HAVE COMPLETED THIS SECTION, YOU WILL BE ABLE TO EXPLAIN INFLATION AND THE REASONS FOR FLUCTUATIONS IN THE INFLATION RATE.

• Inflation is a continuous and considerable INCREASE in the general price level resulting from monetary causes which cause the buying power of money to decrease. It needs to be emphasised that an increase in the price of a single item or the once-only rise in the price of a commodity is not regarded as inflation. For price rises to be qualified as inflation, they have to be of a general nature and cover a wide range of commodities, and they must also be considerable. Such an increase in prices will mean that our money cannot buy as much as it previously could. You will, in fact, be worse off.
• As inflation implies a general increase in price levels, it is important to analyse reasons for such an increase.
• Our study of the economic cycle has revealed that the goods stream must always be equal to the currency stream. When the currency stream increases without a simultaneous increase in production/supply of goods, prices will rise because of an increase in the greater demand (resulting from people having more money for purchases.)
• Consumers purchase the following food items for R100,00
• 1 bag of potatoes
• 1 tray of tomatoes
• 1 bag mealie meal
• 1 box avocadoes
• According to the above model, the average price of each of the listed items is R25 (R100 divided by the 4 items). If the currency stream would somehow increase by R60, the average price of the items would rise to R40 per item [(R100 + R60) divided by the same 4 items]. The increase in the amount of money has therefore resulted in a rise in the price.
• Closely related to this, is the situation where people spend more money on goods and services than the economy is able to provide. In this instance the demand for goods and services rises at a faster rate than the rate at which the units of production are able to deliver their products. This means that prices are forced upward by the greater demand from
• consumers. The situation in which “more money” chases after “fewer goods” is known as DEMAND-PULL INFLATION.
• The prices of goods can also rise because of continuous and considerable wage, benefit and tax increases which, for instance, force up the running costs of enterprises or producers. To be able to maintain his profit margins, the producer will simply have to increase the prices of his products.
• If price increases result from continuous increases in production costs, we have COST PUSH INFLATION, because the increases in running COST place PRESSURE on the selling PRICE and push it UP. Think about the influence of trade unions with their sometimes exorbitant demands for wage increases (i.e. input costs), and the on-going increases in fuel prices (another input cost) because of exchange rate fluctuations.

Activity 1

INFLATION

The information quoted below was published in a newspaper during August 2002. Read the article and answer the questions that follow: