What is Inflation?

This podcast speaks about inflation and what it means for households in South Africa. 

Inflation is a general increase in the level of prices of all goods and services in a country. A once-off increase in the prices of individual products or services, for instance a petrol price hike, cannot be regarded as inflation. This is often referred to as a price impulse and it merely implies that an item has become more expensive. However, when the prices of all goods and services increase and these price increases start a process of continually increasing prices, a country suffers inflation. This is often referred to as an inflationary spiral.

The price level in South Africa is measured by means of the consumer price index (CPI). The rate of change in the CPI is the rate of inflation. Although it can be calculated for any given period, the durations most often used are for the monthly and annual changes.

The CPI is measured at an aggregated average level. Its aim is to reflect the price level faced by the average household. Visualise for example a huge basket containing all the hundreds of goods and services consumed every month by the typical household.

Regardless of its various forms and official definitions we all know what inflation feels like. The money we have in our wallets can purchase less goods and services than before as prices increase. These continuous and wide-spread price increases simply confirm that inflation is present in an economy.