Thursday, 19 November 2009

Eskom price increase does not necessarily increase inflation

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

Inflation is paying more money for the same real value.

In theory, an Eskom electricity price increase (25% or 45%) does not necessarily increase inflation. Everyone will just have less money for other things - all else being equal (the zero increase option).

That is theory.

All else do not stay equal.

Inflation comes about when unscrupulous business people abuse the electricity price increase for unjustified other price increases with no real value increase or no cost increase.

Is it unscrupulous or is it just the normal workings of the free market?

I think it is the normal workings of the free market. I will push my price up to see if I can make more profit. Imperfect market conditions may result in my inflationary actions not being corrected or counter-acted in the free market. They may flow through to the general price increase and may increase inflation: i.e., increase the destruction of the real value of the Rand and all other monetary items in the SA economy above the current 6.1% per annum real value destruction in the Rand.

Gill Marcus and her team at the SARB have to develop measures to combat my actions to simply look after my own self-interest.

Kindest regards,

Nicolaas Smith

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