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Friday, 19 August 2011

Measurement of monetary items during low inflation

Measurement of monetary items during low inflation
Monetary items are normally not inflation–adjusted under HCA during low inflation. Inflation thus erodes the real value of only money and other monetary items evenly throughout the monetary economy in a country implementing the HCA model. Money and other monetary items only maintain their real values perfectly stable, excluding complete indexation of the total money supply, under permanently sustainable zero per cent annual inflation. This has never been achieved on a sustainable basis over an extended period of time. Chile is indexing a substantial part of the country´s money supply on a daily basis with the Unidad de Fomento, but, not yet 100%.

The South African Reserve Bank conducts monetary policy within an inflation targeting framework. The current target is for CPI inflation to be within the target range of 3 to 6 per cent on a continuous basis. SARB

The SARB´s definition of price stability, in practice, results in the erosion of the real value of the Rand at a rate of 6% to 3% per annum. That is the erosion of about R120 billion to R60 billion per annum. Real value is eroded evenly in Rand bank notes and coins and other monetary items (loans, deposits, consumer credit, mortgage credit, monetary investments, car loans, government bonds, etc.) throughout the SA monetary economy. Inflation has no effect on any non–monetary item in the SA or any other economy.

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