The problem with inflation

Jannie Rossouw, visiting professor at Wits Business School at the University of the Witwatersrand, writes that sustained price increases erode consumers' spending power.

- Jannie Rossouw

"Inflation is a process of sustained increases in the general price level over a period of time (typically 12 months).

Inflation can be calculated for a country, for specific regions in a country and for different income and demographic groups, such as pensioners.

These different calculations are important because the spending patterns of regions and groups differ. That means that their rates of inflation also differ. It is therefore important for each household to have a clear understanding of its own inflation rate.

A number of countries allow for the development of this improved understanding. For example, South African households can use an Internet tool such as the personal inflation calculator of Statistics South Africa. A personal inflation calculator, based on the spending patterns of households, is also available for Europe, Canada and New Zealand.

RESEARCH

The phrase describing inflation as ‘enemy number one’ is borrowed from the research done by South African businessman Dr. Anton Rupert on the worldwide inflation problem suffered in the 1970s.

He described inflation in this way due to its distortive impact on the economies of countries and the wealth and financial well-being of households.

But the word inflation has a much earlier origin. Its first use was in the US between 1830 and 1860, when the US dollar started losing value.

In short, people experience inflation as sustained price increases. Prices continue to rise and the same amount of money buys fewer goods and services over time.

WHY IS IT SO BAD?

Inflation is destructive because consumers on fixed incomes, such as pensioners, get poorer over time; the buying power of their money is eroded.