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Friday, 23 October 2009

A 45% electricity price increase should not increase inflation - in theory.

A price increase is paying more money for more real value.

Inflation is paying of more money for the same real value.

In theory, when electricity becomes more valuable in the SA economy and it´s price is increased by 45%, then households would have to spend less on other items – all else being equal.

Thus, no increase or decrease in inflation.

Inflation comes about when business abuses the electricity price increase to increase the general price level instead of just the price of electricity.

A one percent increase in inflation – paying one per cent more for the same real value in general – is expected as a result of the electricity price increase.

A 45% price increase for three years in a row equals a 304% increase over that period.

Kindest regards,

Nicolaas Smith