INFLATION
11 May 2016 By PDSNETInflation is the degree to which a country's currency loses purchasing power over one year - expressed as a percentage. This is usually measured by the consumer price index (CPI), but it can also be measured at the producer level in the Producer Price Index (PPI). In South Africa, the Reserve Bank has set a target to keep the CPI-X rate (which excludes the interest on mortgage bonds) between 3% and 6%. Over the long term, inflation is a result of increasing the money supply more quickly than the real growth of the economy. In simple terms the government creates and spends money and then the rand in your pocket goes down in purchasing power terms. In other words, inflation is a subtle, undisclosed form of taxation. And it is not a new idea. The Romans invented it. Whenever there was a new emperor, they would call in all the gold coins in the country so that they could be minted with the new emperor's image. This gave them the opportunity to melt down the coins and add 20% of lead before re-minting. With the 20% that was left they paid for the next Punic war. In those days it was called debasement. Today we call it inflation - but it is the same thing. It is one of the functions of the central bank to keep inflation at a reasonable level. It has to balance that objective with the objective of ensuring that the economy grows. These two objectives are contradictory because when the economy is growing strongly, then there is usually high inflation and so the monetary policy committee (MPC) has to increase interest rates to keep it under control - and that reduces growth. In June 2022, the America consumer price index (CPI) was at a record high of 9,1% and the MPC had increased rates by 0,75% with the promised of further 0,75% increases during 2022. Obviously, rising interest rates eventually impact negatively on corporate profits and so are bad for share prices.
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