It widely recognized that the monetary policy within a country should be primarily concerned with the pursuit of price stability. However, it is still not clear how this objective can be achieved most effectively. This debate remains unsettled, but an increasing number of countries have adopted inflation targeting as their monetary policy framework. (Dr E J van der Merwe, 2002) This topic of Inflation targeting is a subject which immediately conjures different perceptions from different people. Many feel that low inflation should be a main aim of monetary policy, while others (such as trade union activists) believe that a higher growth rate to stimulate jobs should be the main concern.
In order to understand what inflation targeting is and how it affects us, it is important to first establish what, in fact, inflation is.
Inflation can be defined as an increase in the general price level of goods and services. It is measured as the annual percent change in the prices of goods deemed necessary for life in that country. These goods are included in a "market basket" which changes infrequently, so this measure can reflect fluctuations in the price level as well as the purchasing power of the Rand.
There are two basic types of inflation, namely: cost-push and demand-pull inflation. Cost-push inflation is caused by an increase in the cost of production. Increases in the cost of labor, raw materials, equipment, and borrowing money push the cost of production up resulting in higher overall prices. Demand-pull inflation is caused by an increase in demand or in the supply of money. This increased demand allows producers to charge higher prices.
A lot can be learnt from this economic indicator. High levels of inflation indicate an unp...
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...zon. (Mishkin F, 2000)
Inflation Targeting makes inflation (rather than output or unemployment) the primary goal of monetary policy. This thus makes it evident why some trade unions may not agree with this regime. Although not an intermediate goal of the monetary policy, low and stable inflation is supportive of sustainable growth and employment creation.(SARB, 2005)Inflation targeting has played an important role in strengthening the effect of forward-looking expectations on inflation. I believe the introduction of inflation targeting has benefited the implementation of monetary policy in our country. The application of this framework has strengthened the SARB's focus on price stability and assisted inflation down to low and manageable levels. It has also provided an anchor for expectations of future inflation, which influences price and wage setting. (SARB, 2005)
Inflation occurs when consumers are spending like crazy, and “the central banks flood the system with too much money,” (DPE, 37). They do so through
Inflation means the increase in household spending necessary to maintain a constant standard of living. Also, Inflation in the economies of the currencies that are traded is an important factor to consider because it affects the relative value of these currencies internationally and because it can decide future policy adjustments by governments and central banks. Besides, Inflation is usually measured by governments that use groups of price levels for goods in different sectors known as price indices. These include measures such as a producer price index (PPI), which measures wholesale inflation, and a consumer price index (CPI), which measures inflation for consumers. Governments and central banks often use these indices to help decide their
Monetary policy is an extremely valuable guideline for our economy. Small changes in the money supply can affect the price level, interest rates and almost all aspects of the macroeconomic world. When looking at monetary policy, understanding the variables of each argument can help us determine a more extensive view of each policy.
In this section I will be discussing how inflation rates have increased over the past 40 years, and what effect this has had on monetary growth. Inflation rates are defined as the rate of change in price levels in our economy especially Canada. Surveys are conducted quarterly or monthly to determine and generate a Consumer Price Index. The CPI is conducted with a “basket of goods” to determine changes in consumer prices for Canadians. It is important to study and analyze the rate of inflation because it helps the government determine how the dollar value has changed over a period of time. Also to adjust pending contracts and initiate new pensions which have to take into account the effect of inflation. Less well-off people and elderly are more
Its main focus is on monetary and other financial markets, determination of interest rates, extent to which monetary policy influences the behavior of the economic units and the implication such influence have in the context of macroeconomics. Hence, monetary policy could be defined as an economics of money supply, prices and interest rate, and their consequences in the economy. It therefore focuses on monetary and other financial markets, determination of interest rate, extent to which these policies, influences the behavior of economic units and the implications the influence has in the macroeconomic context. (Jagdish,
In an economy, aggregate demand (AD) accounts for the total expenditure on goods and services. It has five constituents; Consumer expenditure (C), Investment expenditure (I), Government expenditure (G), Export expenditure (X) and import expenditure (M), This gives us: AD= C+I+G+X-M. Aggregate supply (AS) on the other hand is the total supply of goods and services in the economy. Increasing AD and decreasing AS both cause demand-pull and cost-push inflation respectively. Demand pull inflation occurs when aggregate demand (AD) continuously rises, detailed in Figure 1. The AD curve continuously shifts to the right, as demand continuously increases, from point a to b to c. This consequently causes an increase in the price level of goods and services. As prices rise, costs of production also increase, causing producers to reduce output (a decrease in aggregate supply (AS)), shifting the AS curve to the left and leading to yet another increase in prices, (t...
The recent global financial crisis that affected not only America but also Europe and other parts of the world resulted in massive unemployment. This is due to the high costs of operation that many corporations faced forcing them to cut on labor costs. There is need for European government interventions to avert this social crisis and prevent the occurrence of such a crisis in future. Unemployment has hit the service sector harder than other sectors with the following being the most affected: automotive, construction, tourism, finance and real estate. The global financial crisis has also increased consumer prices thus pushing inflation. According to McCathie, “the increase in July consumer prices to 1.7 per cent pushed inflation in the currency bloc up towards the European Central Bank’s target of keeping inflation at below, but close to 2 per cent. Eurozone consumer prices had stood at 1.4 per cent in June” (McCathie, 2010).
(O’Sullivan) Inflation causes each unit of currency to become weaker. In turn, this causes interest rates to rise as compared to the period before inflation. (O’Sullivan) Inflation rate is an annualized percentage change of the general price index over time, and is also the main measure of price inflation. (O’Sullivan) At the start of 2014, the inflation rate for the United States was recorded at 1.6%, but that figure has risen to 2.0% as of July 2014. (US Inflation Calc.) Over the last five years, the inflation rate of the United States has averaged right around 2%. (US Inflation Calc.) Both positive and negative fluctuations in this rate are due to increases or decreases in consumer spending, but the rate has still remained relatively stable. One factor in the stable inflation in the United States can be attributed to the lack of unnecessary growth in the supply of money by the Federal Reserve. Another factor can be attributed to fluctuations in demand for goods and services, and changes in available
Inflation rate is one of the factors that will influence the volatility and risk of stock market. Inflation is categorized into two categories which are expected inflation and unexpected inflation. Expected inflation defines that there was a plan which created by the economics and consumers year by year. It is less of people holding the cash over time to avoid the condition of depreciation value of money. While, unexpected inflation is dependent on the estimation of the economic and consumers. In general, unexpected inflation brings more harmful effect than expected inflation. The major effect of unexpected inflation is a redistribution of
Inflation occurs when the prices of goods and services increase over time. Inflation cannot be measured by an increase in the cost of one product or service, or even several products or services.
Inflation targeting (henceforth IT) as a monetary framework has been tested for over 2 decades by many nations across the world. Currently there are 34 nations officially adopting inflation targeting as their sole monetary policy. This includes 25 developing nations and 9 developed nations.
Effects of inflation are market inefficiencies, and create complicate for firms to plan long-term finance. Inflation can serve as a burden on productivity as organizations are compelled to change resources away from products and services for targets on profit and losses from inflation of currency. Concern about the power of purchasing in future of money depresses investment and saving and inflation can charge hidden tax raises. Higher inflation in one economy than another will lead to the exports of first economy to become more costly and impact the trade balance in trading
One of the most common monetary policy strategies employed by countries wishing to achieve price stability is inflation targeting, which involves five different elements. Despite the commonality of its usage, inflation targeting has numerous disadvantages as cited by critics (Mishkin & Eakins, 2012).
Inflation is the rate at which the purchasing power of currency is falling, consequently, the general level of prices for goods and services is rising. Central banks endeavor to point of confinement inflation, and maintain a strategic distance from collapse i.e. deflation, with a specific end goal to keep the economy running smoothly.
Inflation is one of the most important economic issues in the world. It can be defined as the price of goods and services rising over monthly or yearly. Inflation leads to a decline in the value of money, it means that we cannot buy something at a price that same as before. This situation will increase our cost of living.