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Thursday, 29 March 2012

Daily valuation required

Daily valuation required

Constant items’ real values are maintained constant over time under CIPPA by means of measurement of financial capital maintenance in units of constant purchasing power in terms of a Daily CPI or monetized daily indexed unit of account during low inflation, high inflation and deflation and in terms of a relatively stable foreign currency daily parallel rate (normally the US Dollar daily parallel rate) or a daily Brazilian-style Unidade Real de Valor index during hyperinflation. Daily measurement of constant items is essential in the case of trade debtors, trade creditors and all other non-monetary payables and receivables which can be paid on any day of the month.

When it is intended to maintain the real value of a monetary item, for example, a government inflation-indexed bond during inflation, it is immediately realized that a Daily Consumer Price Index is required since these bonds trade on a daily basis. Many countries use Daily CPIs to value these bonds on a daily basis.

A daily US Dollar (or other relatively stable foreign currency) parallel rate is generally spontaneously used by the population and in the consumer markets to value variable real value non-monetary items on a daily basis during hyperinflation.

Brazil, for example, used government supplied daily indices from 1964 to 1994 to index most non-monetary items on a daily basis in the entire economy during 30 years of very high inflation and hyperinflation of up to 2000 per cent per annum.

‘Não temos como fornecer, conforme solicitado, os detalhes exatos do indexador utilizado durante o período de alta inflação no Brasil. Vale esclarecer que, desde 1964, quando foi implementado o Programa de Ação Econômica do Governo – PAEG, vários mecanismos de indexação foram introduzidos na economia brasileira objetivando reduzir os efeitos da inflação não antecipada sobre o lado real da economia. Podemos destacar os mecanismos destinados à taxa de câmbio, aos salários e e à correção monetária de ativos financeiros. Ao longo da existência das ORTNs e de seus sucedâneos, por exemplo, os governos mudaram em diversas oportunidades as fórmulas de cálculo da correção monetária e trocaram várias vezes os índices de preços que eram utilizados no cálculo da mesma.

Assim sendo, sugerimos uma consulta ao Ministério da Fazenda, que talvez possa fornecer o histórico dos indexadores utilizados no País.’

(Central Bank of Brazil, 2010)
Chile has been using a monetized daily indexed unit of account, the Unidad de Fomento, to inflation index a part of its money supply since 1977. The UF´s value is calculated and published daily by the Banco Central de Chile since 1990.

Prof. Robert Shiller stated:

‘Another coordination problem is that we must decide, and agree, on a way to smooth the CPI. We should not define prices just in terms of the latest CPI because the CPI is vulnerable to sudden jumps from month to month. This is particularly true when we are talking about indexing financial contracts to the CPI. A unit of account like the UF would smooth out the CPI movements, otherwise there would be important jumps in deposit balances on the dates of new announcements of the CPI. Thus, the smoothing of the CPI in producing the UF has also been a fundamental part of the functioning of the UF as an analogue of money.’



A Daily CPI is thus a fundamental requirement when implementing financial capital maintenance in units of constant purchasing power (CIPPA).


Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.

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