What price stability?
“The South African Reserve Bank is the central bank of the Republic of South Africa. It regards its primary goal in the South African economic system as the achievement and maintenance of price stability.
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.” SA Reserve Bank.
Absolute price stability is a year–on–year increase in the Consumer Price Index of zero percent. Alan Greenspan defines price stability as follows:
“Price stability obtains when economic agents no longer take account of the prospective change in the general price level in their economic decision–making.”
http://www.kansascityfed.org/PUBLICAT/SYMPOS/1996/pdf/s96green.pdf
, Page 1.
It can be deduced from Alan Greenspan´s excellent definition that price stability can be defined as permanently sustainable zero per cent per annum inflation.
A year–on–year increase in the CPI of above zero but below 2% is a high degree of price stability – it is not absolute price stability.
“The ECB´s Governing Council has announced a quantitative definition of price stability:
Price stability is defined as a year–on–year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%.
The Governing Council has also clarified that, in the pursuit of price stability, it aims to maintain inflation rates below, but close to, 2% over the medium term.” European Central Bank
http://www.ecb.int/mopo/strategy/pricestab/html/index.en.html
A below 2% year–on–year increase in the European Monetary Union’s harmonized CPI is the European Central Bank’s chosen definition of price stability. It is not the factual definition of absolute price stability. The SARB´s chosen definition of price stability is for “inflation to be within the target range of 3 to 6 per cent on a continuous basis”.
Accounting, on the other hand, solve the problem of the fact that the monetary unit is never perfectly stable on a sustainable basis by simply assuming that the monetary unit is perfectly stable in the world´s low inflationary economies, but, only for the purpose of valuing balance sheet constant real value non–monetary items and most income statement items which are accounted as Historical Cost items: they are measured in nominal monetary units. In conformity with world practice the stable measuring unit assumption is not applied of the valuing of certain (not all) Income Statement constant real value non–monetary items, namely salaries, wages, rentals, etc. which are measured in units of constant purchasing power on an annual basis in terms of the CPI. These items annually updated items are then paid on a monthly basis again applying the stable measuring unit assumption; they are not updated monthly in terms of the monthly change in the annual rate of inflation. Other income statement items are valued in nominal monetary units, i.e. at HC.
Changes in the general purchasing power or real value of the monetary unit are not regarded to be sufficiently important to continuously measure financial capital maintenance in units of constant purchasing power authorized in IFRS in the original Framework (1989), Par 104 (a). Financial capital maintenance in nominal monetary units (HCA) is generally chosen under which the very erosive stable measuring unit assumption is implemented, also authorized in IFRS in the Framework (1989), Par 104 (a). It is impossible to maintain the existing constant real non-monetary value of existing capital constant by measuring financial capital maintenance in nominal monetary units per se during low inflation or deflation. Financial capital maintenance in nominal monetary units per se during inflation and deflation is a fallacy.
However, this led to the general implementation of the traditional Historical Cost Accounting model during non–hyperinflationary periods. Both variable real value non–monetary items stated at HC in terms of IFRS or GAAP, as well as constant real value non–monetary items also stated at HC in terms of the HCA model, are measured in nominal monetary units during non–hyperinflationary periods. Both HC variable and HC constant real value non–monetary items are thus considered to be simply HC non–monetary items.
There is a fixation in financial reporting that measurement in units of constant purchasing power simply means adjusting HC or CC period-end financial statements in terms of the period-end CPI mainly to make current year financial statements more useful only during hyperinflation. This is called restatement. Measurement in units of constant purchasing power is almost always automatically thought of as inflation accounting applied only during hyperinflation as defined in IAS 29 Financial Reporting in Hyperinflationary Economies. Measurement in units of constant purchasing power is not automatically thought of as affecting the fundamental constant real non-monetary values of existing constant real value non-monetary items (e.g. salaries, wages, rentals, shareholders´ equity, trade debtors, trade creditors, taxes payable, taxes receivable, etc.) in a double entry accounting model although that is what is done with world wide annual measurement in units of constant purchasing power of salaries, wages, rentals, etc. The two processes are seen as different processes – when, in principle, they are not.
Under Constant Item Purchasing Power Accounting financial capital maintenance is measured in units of constant purchasing power as authorized in IFRS. Only constant real value non-monetary items (not variable real value non-monetary items) are measured in units of constant purchasing power in terms of the monthly CPI. CIPPA automatically maintains the existing constant real value of all constant items constant for an indefinite period of time in all entities that at least break even during low inflation and deflation, whether they own any revaluable fixed assets or not
Nicolaas Smith
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Showing posts with label What price stability?. Show all posts
Showing posts with label What price stability?. Show all posts
Monday 16 May 2011
Saturday 26 February 2011
What price stability?
“The South African Reserve Bank is the central bank of the Republic of South Africa. It regards its primary goal in the South African economic system as the achievement and maintenance of price stability.
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.
Absolute price stability is a year-on-year increase in the Consumer Price Index of zero percent. Alan Greenspan defines price stability as follows:
“Price stability obtains when economic agents no longer take account of the prospective change in the general price level in their economic decision-making.”
http://www.kansascityfed.org/PUBLICAT/SYMPOS/1996/pdf/s96green.pdf
, Page 1.
It can be deduced from Mr Greenspan´s excellent definition that price stability can be defined as permanently sustainable zero per cent per annum inflation.
A year-on-year increase in the CPI of above zero but below 2% is a high degree of price stability – it is not absolute price stability.
“The ECB´s Governing Council has announced a quantitative definition of price stability:
Price stability is defined as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%.
The Governing Council has also clarified that, in the pursuit of price stability, it aims to maintain inflation rates below, but close to, 2% over the medium term.” European Central Bank
http://www.ecb.int/mopo/strategy/pricestab/html/index.en.html
A below 2% year-on-year increase in the European Monetary Union’s harmonized CPI is the European Central Bank’s chosen definition of price stability. It is not the factual definition of absolute price stability. Theoretically, the SARB´s chosen definition of price stability is for “inflation to be within the target range of 3 to 6 per cent on a continuous basis”.
Accountants, on the other hand, solve the problem of the fact that the monetary unit is never perfectly stable on a sustainable basis by simply assuming that the monetary unit is perfectly stable in the world´s low inflationary economies, but, only for the purpose of valuing balance sheet constant real value non-monetary items and most income statement items which they account as Historical Cost items: they measure them in nominal monetary units. In conformity with world practice they do not apply this assumption to the valuing of certain Income Statement constant real value non-monetary items, namely salaries, wages, rentals, etc. which they inflation-adjust annually in terms of the CPI. They value other income statement items in nominal monetary units, i.e. at HC.
Accountants do not regard changes in the general purchasing power or real value of the monetary unit to be sufficiently important to continuously measure financial capital maintenance in units of constant purchasing power as they have been authorized by the IASB in the Framework, Par 104 (a) in 1989. They generally choose to implement financial capital maintenance in nominal monetary units, also authorized by the IASB in the Framework, Par 104 (a). It is impossible to maintain the real value of existing constant real value capital constant by measuring financial capital maintenance in nominal monetary units per se during low inflation or deflation. Financial capital maintenance in nominal monetary units per se during inflation and deflation is a fallacy.
This led accountants to choose to implement the traditional Historical Cost Accounting model during non-hyperinflationary periods where under they select to maintain the stable measuring unit assumption (also IASB-approved and also based on a fallacy) for an unlimited period of time during indefinite inflation. They value both variable real value non-monetary items stated at HC in terms of IFRS or GAAP, as well as constant real value non-monetary items also stated at HC in terms of the HCA model, in nominal monetary units during non-hyperinflationary periods. Both HC variable and HC constant items are thus considered by accountants to be simply HC non-monetary items.
There is a fixation in accounting that measurement in units of constant purchasing power (restatement) simply means adjusting company financial statements mainly to make current year statements more comparable with previous year statements. Measurement in units of constant purchasing power is not automatically thought of as affecting the fundamental values of the underlying resources although that is what is done with world wide annual measurement in units of constant purchasing power of salaries, wages, rentals, etc. The two processes are seen as different processes - when they are not.
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
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.
Absolute price stability is a year-on-year increase in the Consumer Price Index of zero percent. Alan Greenspan defines price stability as follows:
“Price stability obtains when economic agents no longer take account of the prospective change in the general price level in their economic decision-making.”
http://www.kansascityfed.org/PUBLICAT/SYMPOS/1996/pdf/s96green.pdf
, Page 1.
It can be deduced from Mr Greenspan´s excellent definition that price stability can be defined as permanently sustainable zero per cent per annum inflation.
A year-on-year increase in the CPI of above zero but below 2% is a high degree of price stability – it is not absolute price stability.
“The ECB´s Governing Council has announced a quantitative definition of price stability:
Price stability is defined as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%.
The Governing Council has also clarified that, in the pursuit of price stability, it aims to maintain inflation rates below, but close to, 2% over the medium term.” European Central Bank
http://www.ecb.int/mopo/strategy/pricestab/html/index.en.html
A below 2% year-on-year increase in the European Monetary Union’s harmonized CPI is the European Central Bank’s chosen definition of price stability. It is not the factual definition of absolute price stability. Theoretically, the SARB´s chosen definition of price stability is for “inflation to be within the target range of 3 to 6 per cent on a continuous basis”.
Accountants, on the other hand, solve the problem of the fact that the monetary unit is never perfectly stable on a sustainable basis by simply assuming that the monetary unit is perfectly stable in the world´s low inflationary economies, but, only for the purpose of valuing balance sheet constant real value non-monetary items and most income statement items which they account as Historical Cost items: they measure them in nominal monetary units. In conformity with world practice they do not apply this assumption to the valuing of certain Income Statement constant real value non-monetary items, namely salaries, wages, rentals, etc. which they inflation-adjust annually in terms of the CPI. They value other income statement items in nominal monetary units, i.e. at HC.
Accountants do not regard changes in the general purchasing power or real value of the monetary unit to be sufficiently important to continuously measure financial capital maintenance in units of constant purchasing power as they have been authorized by the IASB in the Framework, Par 104 (a) in 1989. They generally choose to implement financial capital maintenance in nominal monetary units, also authorized by the IASB in the Framework, Par 104 (a). It is impossible to maintain the real value of existing constant real value capital constant by measuring financial capital maintenance in nominal monetary units per se during low inflation or deflation. Financial capital maintenance in nominal monetary units per se during inflation and deflation is a fallacy.
This led accountants to choose to implement the traditional Historical Cost Accounting model during non-hyperinflationary periods where under they select to maintain the stable measuring unit assumption (also IASB-approved and also based on a fallacy) for an unlimited period of time during indefinite inflation. They value both variable real value non-monetary items stated at HC in terms of IFRS or GAAP, as well as constant real value non-monetary items also stated at HC in terms of the HCA model, in nominal monetary units during non-hyperinflationary periods. Both HC variable and HC constant items are thus considered by accountants to be simply HC non-monetary items.
There is a fixation in accounting that measurement in units of constant purchasing power (restatement) simply means adjusting company financial statements mainly to make current year statements more comparable with previous year statements. Measurement in units of constant purchasing power is not automatically thought of as affecting the fundamental values of the underlying resources although that is what is done with world wide annual measurement in units of constant purchasing power of salaries, wages, rentals, etc. The two processes are seen as different processes - when they are not.
Copyright (c) 2005-2011 Nicolaas J Smith. All rights reserved. No reproduction without permission.
Wednesday 17 February 2010
What price stability?
“The South African Reserve Bank is the central bank of the Republic of South Africa. It regards its primary goal in the South African economic system as the achievement and maintenance of price stability.
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.
Absolute price stability is a year-on-year increase in the Consumer Price Index of zero percent. A year-on-year increase in the CPI of above zero but below 2% is a high degree of price stability – it is not absolute price stability.
“The ECB´s Governing Council has announced a quantitative definition of price stability:
Price stability is defined as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%.
The Governing Council has also clarified that, in the pursuit of price stability, it aims to maintain inflation rates below, but close to, 2% over the medium term.” European Central Bank
http://www.ecb.int/mopo/strategy/pricestab/html/index.en.html
A below 2% year-on-year increase in the European Monetary Union’s harmonized CPI is the European Central Bank’s chosen definition of price stability. It is not the factual definition of absolute price stability. Theoretically, the SARB´s chosen definition of price stability is for “inflation to be within the target range of 3 to 6 per cent on a continuous basis”. In fact, the SARB´s chosen definition of price stability is for inflation to be 6% per annum on a continuous basis because when inflation targeting is implemented inflation generally trends to the upper limit.
SA accountants, on the other hand, simply assume that the Rand is perfectly stable in SA´s low inflationary economy, but, only for the purpose of valuing balance sheet constant real value non-monetary items which they account as Historical Cost items. In conformity with world practice they do not apply this assumption to the valuing of certain Income Statement constant items, namely salaries, wages, rentals, etc. They value other income statement items in nominal monetary units, i.e. at HC. SA accountants do not regard changes in the general purchasing power or real value of the Rand to be sufficiently important to measure financial capital maintenance in units of constant purchasing power as they have been authorized by the IASB in the Framework, Par 104 (a) in 1989.
They generally choose to implement financial capital maintenance in nominal monetary units, also authorized by the IASB in the Framework, Par 104 (a) in 1989. It is impossible to maintain the real value of capital stable by measuring financial capital maintenance in nominal monetary units per se during low inflation or deflation. Financial capital maintenance in nominal monetary units per se during inflation and deflation is a fallacy.
Kindest regards,
Nicolaas Smith
Copyright © 2010 Nicolaas J Smith
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.
Absolute price stability is a year-on-year increase in the Consumer Price Index of zero percent. A year-on-year increase in the CPI of above zero but below 2% is a high degree of price stability – it is not absolute price stability.
“The ECB´s Governing Council has announced a quantitative definition of price stability:
Price stability is defined as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%.
The Governing Council has also clarified that, in the pursuit of price stability, it aims to maintain inflation rates below, but close to, 2% over the medium term.” European Central Bank
http://www.ecb.int/mopo/strategy/pricestab/html/index.en.html
A below 2% year-on-year increase in the European Monetary Union’s harmonized CPI is the European Central Bank’s chosen definition of price stability. It is not the factual definition of absolute price stability. Theoretically, the SARB´s chosen definition of price stability is for “inflation to be within the target range of 3 to 6 per cent on a continuous basis”. In fact, the SARB´s chosen definition of price stability is for inflation to be 6% per annum on a continuous basis because when inflation targeting is implemented inflation generally trends to the upper limit.
SA accountants, on the other hand, simply assume that the Rand is perfectly stable in SA´s low inflationary economy, but, only for the purpose of valuing balance sheet constant real value non-monetary items which they account as Historical Cost items. In conformity with world practice they do not apply this assumption to the valuing of certain Income Statement constant items, namely salaries, wages, rentals, etc. They value other income statement items in nominal monetary units, i.e. at HC. SA accountants do not regard changes in the general purchasing power or real value of the Rand to be sufficiently important to measure financial capital maintenance in units of constant purchasing power as they have been authorized by the IASB in the Framework, Par 104 (a) in 1989.
They generally choose to implement financial capital maintenance in nominal monetary units, also authorized by the IASB in the Framework, Par 104 (a) in 1989. It is impossible to maintain the real value of capital stable by measuring financial capital maintenance in nominal monetary units per se during low inflation or deflation. Financial capital maintenance in nominal monetary units per se during inflation and deflation is a fallacy.
Kindest regards,
Nicolaas Smith
Copyright © 2010 Nicolaas J Smith
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