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Question of the Day: What's the most interesting small town you've visited in South Africa?
Inflation rates: How do we lower them?
- Thread starter Thor
- Start date
Mike Hoxbig
Honorary Master
Strengthen the currency, better economic growth...
How does strengthening the currency help with inflation?
I think the main drivers of inflation are:
- Unrealistic wage demands - Unions are constantly demanding increases way above inflation without offering any productivity gains. Companies meet this by increasing prices which further increasing inflation.
- Currency fluctuations - when the currency devalues, prices of imported goods increases. When the currency strengthens, companies often keep prices a bit higher to recover previous losses, increase profitability or to absorb increased input costs or wage demands.
- The drought - The recent drought has increased food price inflation by quite a lot. This has been compounded by currency fluctuations for imported food and higher demand for wages due to the increased price of basic food.
The drought obviously can't be controlled (although better management of water resources would probably help in future).
Unions need to become more realistic with wage demands. Unfortunately the demands are high across the board and not just in industries where pay is very poor.
Currency controls could go a long way to reducing the fluctuations on the currency as while our economy is only the 35th largest in the world, the rand is the 13th most traded currency. This is because many other emerging market currencies have stronger exchange controls so the rand is used as a proxy for speculators and hedge funds trading on emergency market sentiment. This would likely increase the value of the rand as well which may be bad for exporters, but good for importers and inflation.
- Unrealistic wage demands - Unions are constantly demanding increases way above inflation without offering any productivity gains. Companies meet this by increasing prices which further increasing inflation.
- Currency fluctuations - when the currency devalues, prices of imported goods increases. When the currency strengthens, companies often keep prices a bit higher to recover previous losses, increase profitability or to absorb increased input costs or wage demands.
- The drought - The recent drought has increased food price inflation by quite a lot. This has been compounded by currency fluctuations for imported food and higher demand for wages due to the increased price of basic food.
The drought obviously can't be controlled (although better management of water resources would probably help in future).
Unions need to become more realistic with wage demands. Unfortunately the demands are high across the board and not just in industries where pay is very poor.
Currency controls could go a long way to reducing the fluctuations on the currency as while our economy is only the 35th largest in the world, the rand is the 13th most traded currency. This is because many other emerging market currencies have stronger exchange controls so the rand is used as a proxy for speculators and hedge funds trading on emergency market sentiment. This would likely increase the value of the rand as well which may be bad for exporters, but good for importers and inflation.
InTheCube
Expert Member
The answer to most of this country's biggest problems starts with voting out the cANCer. Until then, we're all just pissing into the wind. Anything we try will either by struck down because we need arrogant and ignorant "African" solutions to our pretty normal already-solved-elsewhere-a-gazillion-times problems, or because of corruption, theft and looting.
Want to solve the education problem? Get rid of the cANCer.
Want to solve the poor public healthcare problem? Get rid of the cANCer.
Want to solve the Zuma problem? Get rid of the cANCer.
Want to solve the crime problem? Get rid of the cANCer.
Want to solve the electricity problem? Get rid of the cANCer.
Want to solve the looming water problem? Get rid of the cANCer.
Want to solve the X problem? Get rid of the cANCer. (replace X with almost any of South Africa's problems).
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Currency is possibly the biggest factor, especially since we are a net importer - we import more than we export. Companies need to increase their prices when their input costs go up - inflation is a measure of just that - how much a basket of goods has increased for the year.
Think about:
- Goods purchased to be resold (anything in a shop - electronics, fashion, cars, watches, you name it, we probably import it)
- Inputs to manufacturing - Parts or components that have to be imported to
- Crude Oil - Oil is purchased to be refined to petrol. Increases in petrol increases costs to transport goods and increases commuting costs.
- Plants and machinery - Required for manufacturing or power stations, etc.
- Software and services - Companies that rely on expensive software or services from international companies need to pay in foreign currency which increases their input costs.
- Jewellery - Even Gold and Platinum that are mined locally are priced in dollars as the mines will sell it internationally if we don't purchase it. The world price means that we pay more when the rand decreases even though it never leaves our shores.
inflation is a monetary phenomenon is the classic saying
and the US is not particularly happy its inflation is close to zero since it limits its monetary space
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Inflation is needed for growth as its what actually drives investment. at our present rate i think the rand devalues by 50% every 5 yrs (excludes currency impact).. conversely your money doubles in investment during the same period as a minimum. While the US consumers prefer a close to 0% inflation rate.. it kills growth and is why jobs and growth thereof is more limited.
Mike Hoxbig
Honorary Master
I would think that the prime lending rate drives foreign investment more than inflation...
inflation drives consumption and acts as a tax on wages, the (real) interest rate and the certainty of economic conditions are two factors that have a stronger influence on investment than inflation itself