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Inflation
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"Inflation is a sustained and significant increase in the general price level." Andre Roux.
This definition implies that only when price increases are recorded for a wide range of goods and services, do inflation occur.
The general price level is measured by the ‘Consumer Price Index’ (CPI). To calculate the CPI, some 600 goods and services are included in a ‘basket’. The ‘weight’ of each is determined by surveys of household expenditure. The two items that weigh most are food and housing.
The Consequences Of Inflation
The next table shows how inflation has eroded the purchasing power of your money since 1970:
The second column of the table shows that price of a basket of goods costing R100 in 1970, was R 1705 in 1994. Put differently, the average price level in 1994 was 17 times higher than in 1970.
|
Year |
CPI |
The purchasing power of the 1970s R1000 |
|
1970 |
100 |
R1 000 |
|
1975 |
157 |
R 637 |
|
1980 |
277 |
R 361 |
|
1985 |
533 |
R 188 |
|
1990 |
1 086 |
R 92 |
|
1994 |
1 705 |
R 59 |
The third column in the table shows how the purchasing power of R1 000 has declined over the mentioned two decades. In 1970 R1 000 enabled you to buy 1 000 goodies, ten years later that same R1 000 would buy 361 goodies; while in 1994 you could only buy 59 goodies with your hard earned R1 000.
In 1970-1994, South Africa’s inflation rate was very high, reaching the highest scale of 15% by 1988. The consequences of persistently high inflation are always negative for the economy.
First, and most obvious, is that inflation reduces your purchasing power. If disposable income rises by say 10% every year while inflation averages 15% per year, then your purchasing power actually declines by roughly 5% a year.
Inflation favours debtors at the expense of creditors. Let’s assume you entered into a hire-purchase agreement where you have to make 60 monthly payments of R100 each to a supplier; with the annual inflation rate of 15%. In a year’s time the actual purchasing power of your R100 would have fallen to R85; and by year 5 your R100 will be worth R50. In effect you are paying your debt with cheaper money. The seller of cause, is affected in the exact opposite way – the instalments he receives from you is declining because of inflation. In short, inflation redistributes wealth – taking away from creditors in favour of debtors.
In conclusion: inflation can be a vicious cycle, and everything possible must be done to curb price rises. For consumers, this means avoiding, as far as possible, the use of credit to finance the purchase of goods, especially so-called luxury items.