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Friday, 8 January 2010

Gill Marcus can rid SA of 3% inertial inflation

From Wikipedia:

"In the medium-to-long term, economic agents begin to forecast inflation and to use those forecasts as de facto price indexes that can trigger price adjustments before the actual price indices are made known to the public. This cycle of forecast-price adjustment-forecast means current inflation becomes the basis for future inflation (more formally, economic agents start to adjust prices solely based on their expectations of future inflation)."

In my opinion, half of SA´s 6% inflation is simply unnecessarily destructive and economically destabilizing inertial or built-in inflation that can be done away with given sufficient "political will" from Gill Marcus and her team at the SARB. Marcus can eliminate that 3% inertial inflation by creating a lower, but still within the inflation target range, inflation expectation.

She and her team already have the necessary credibility that they stick to their word. It may simply be a matter of developing that 3% expectation in the economy and educating the population about the advantages of lower inflation.

I am convinced that SA can do with 3% inflation exactly the same as with 6% inflation. It is within the target range, is it not? So, what is wrong with 3%? All interest rates can come down by 3% too. Everybody gains.

Obviously, Eskom may be the fly in the ointment maybe being responsible for at least a 1% increase in inflation.

Kindest regards,

Nicolaas Smith