1. Inflation A brief summary of Inflation Handout, Prepared by LJ, 05.07.16

2. Description Definition: sustained, significant, increase, general price level, over period of time (5). Key InstitutionSARB CommitteeMPC Key instrumentInterest Rates Inflation target3 – 6% Policy InstrumentMonetary Policy Calculations done byStats SA Rand DepreciatesInflation will increase.

3. Measuring Inflation; Types of Inflation

4. Measuring Inflation; Types of Inflation; Causes of Inflation Hyperinflation: extreme form of inflation; more than 50% per month. Stagflation: low economic growth, combined with high inflation. Deflation: Decrease in prices of goods and services, over a long period of time. Causes of inflation Monetary Inflation: increase in amount of money in circulation; too much money chasing too few goods.

5. Causes of Inflation Demand-pull/demand inflation Occurs when AD (Aggregate Demand) > AS (Aggregate Supply). Causes: Increase in Consumption (could be as a result of less savings; reduction in taxes). Access to credit (reduced interest rates; availability of credit cards and overdraft facilities). Investment Spending (lower interest rates leading to greater investment by business). Government Spending (government borrows money from banks). Export earnings (if increased exports is accompanied by no increase in production, then inflation follows).

6. Causes of Inflation Cost Push Inflation Triggered by an increase in the cost of production. Causes Supply shocks (e.g. sudden increase in petrol price). Increase in factor prices (e.g. wages). Depreciation in exchange rate (imported goods become more expensive). Increase in profits (entrepreneur has more money to spend). Decrease in productivity levels (more expensive to produce same output). Natural Disasters (creates scarcity of goods).

7. Consequences of Inflation Decreases buying power of money (i.e. less can be purchased with same amount of money). Increase in poverty levels. Effects distribution of income and wealth (persons earning rentals, which increases slowly relative to inflation; pensioners [fixed income] negatively effected). Psychological influence (spend now for fear of price rises). Negative influence on savings (less savings). Increased unemployment (reduced demand for products due to higher price, which in turn creates unemployment) … see page 7 of handout for more …

8. Measures to combat inflation Monetary Measures (the role of the SARB) SARB adjusts amount of money in the economy. Excess inflation requires reduction of money supply. Instruments: repo rate, reduce banks granting of credit, moral pressure, relaxing exchange controls (?) Fiscal Policy Use of taxation and/or government expenditure. Fiscal Policy Measures Incresed direct/indirect taxation; reduce government spending; imposing surcharge on imported goods …

9. Measures to combat inflation Structural/Other Measures Increased productivity. Encourage savings. Curtail borrowings. Stricter conditions for consumer credit.

10. Effects of inflation on tax revenue; Taxing of Fuel by Provinces; Provincial tax income. Effects of inflation on tax revenue Positive: Higher Prices leads to more tax. Negative: Drop in productivity leads to unemployment. Taxing of fuel by provinces Additional source of revenue. Sources of provincial income Licence fees; Toll gate fees.

11. Impact of fuel levies on inflation; Groups disadvantaged; Impact on poorest of the poor Impact of fuel levies Increased transport costs leading to higher product prices. Shared lift opportunities Groups disadvantaged by inflation Pensioners; Creditors (discuss); lower income groups. Impact on the poorest of the poor Purchasing power of money reduced (same basket of goods now costs more). Income and wealth (meager income buys less) Social impact (HIV/AIDS; “family imbalances”).

12. Effect of repo rate increase on the economy Reduced money demand Increased savings. Increased mortgage bond payment. Credit more expensive. Job losses Reduced inflation … end page 10 of Inflation handout. Next: Environmental Sustainability …