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Friday, 30 May 2008

"OK, so what measure of inflation do we use?"

Nicolaas Smith on 2008/05/29 11:15:17 PM - Re: Neelsie Naamloos

Finweek


"OK, so what measure of inflation do we use"

CPI which is 11.1% at the moment.

"should it be a one-sided decision by the company, or will they consult labour on the monthly salary adjustement?"

When all accountants decide to abandon the stable measuring unit assumption it will apply throughout SA. It will be an automatic monthly adjustment to all constant items [salaries, wages, rents, fees, retainers, royalties, issued share capital, retained income, personal taxes, trade debtors, trade creditors, company taxes, value added taxes, all items in the profit and loss account, etc] in terms of the monthly inflation rate (CPI). Computer accounting programs will have to be upgraded for this purpose. Any individual company or economic entity can do this.

"How will such a system be administrated so that it is equitable to everyone,"

It is equitable since all constant items are updated monthly in a non-hyperinflationary economy at the monthly inflation rate and daily in a hyperinflationary economy at the daily parallel rate of daily index rate. It is simply an admittance that the Rand´s real value is being destroyed by inflation. So, only all constant items have to be adjusted at the monthly rate of inflation. It is simply a matter of maintaining all constant items´ real values, because, when any constant item is never updated, eg. retained income, then its real value is destroyed at the rate of infaltion

See this peer reviewed article in  Accountancy SA


"and what will the costs be?"

The cost of upgrading accounting programs and training accounting staff in updating constant items.

"And why will inflation stabilize if everyone's avaialable cash keeps growing at the rate of inflation in any case?"

Inflation is the destruction of value. When constant items are never or not fully updated at the monthly rate of inflation then their real values are being destroyed at the rate of inflation when they are never updated (retained income) or at a lower rate when they are not fully updated (salaries, wages). When accountants abandon the stable measuring unit assumption and update all constant items monthy then no real value will be destroyed in constant items for an indefinite period of time. That is thus zero destruction of real value in constant items, that is 0% inflation in constant items only.

We will still have 11.1% cash inflation in monetary items, that is in the Rand and in all monetary items. The real economy will be stabilized, internal demand will be stabilized. The destruction of the real economy will stop for an indefinite period of time. Accountants will maintain billions of Rand in constant item real value in the real economy instead of destroying billions of Rand in the real economy each and every year

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