Thread by @talkcentss

❗️What is Inflation ❗️

( thread ) 👇🏽

There are two types of inflationary pressures in an economy:

1. Cost-push Inflation

2. Demand-pull Inflation.

Before I explain each one, you should read the thread below to catch up.

https://twitter.com/talkcentss/status/1429674047948738566

1/
Cost-push Inflation

Is the increase in the cost of wages and raw materials.

Cost-push inflation can occur when higher costs of production decrease the aggregate supply in the economy. (amount of total production)

* South Africa’s Inflation is
cost-push inflation,imo

Higher interest rates rarely work

The aim with ⬆️ interest rates is to protect currency, so importing costs come down - thus bringing ‘inflation’ down too

Stronger currency =cheaper goods
Weaker currency = expensive goods

Ultimately,

increasing rates now in SA is a policy mistake, because it contracts the economy.

SARB reacts rather than dictates.

Mandate of SARB is backwards, they fight inflation at the expense of GDP. GDP growth will continue to decline and unemployment will rise.

2/
Demand-pull inflation

is the upwards pressure on prices that follows a shortage in supply.

This is the inflation we have all learnt,

‘Too much money (currency) chasing too few goods’

It’s caused by an expanding economy or increased government spending

So, tell me?

SA’s economy is contracting so how do we have demand-pull inflation?

This type of inflation warrants interest rates hikes when the economy is running too hot, but our economy isn’t running hot.

IMO, we can afford not to hike rates and take a bit of devaluation.

Lowering rates will cause demand- pull inflation if there is no economic production as a result. It’s a balancing act

SA doesn’t have demand-pull inflation because our economy isn’t expanding

It’s why no one feels as if there is enough money going around. There is an R shortage

3/
SARB’s Mandate

South African Reserve Bank is a re- actor and what ever happens globally is what will dictate their stance.

In my opinion, their current mandate ( to protect currency) is there to protect those with wealth and not to help the working class.

Higher prices may seem scary,

but if your real wage growth is growing faster than the rate of inflation, your wealth is actually growing(Increasing purchasing power)

This won’t come without capital/ productivity

So although bread could cost R30 now, your salary could double

4/
As Milton Friedman famously said,

“Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output”

It can be both bad and good for an economy.

5/
How to protect my Wealth?

Wealth is destroyed by the erosion of your purchasing power over time

For ex:

Bread now costing R30, but your wages haven’t grown

So you need to invest in companies that have pricing power, who can maintain prices at higher rates than inflation

Is Sasol one of those companies?

Are they an inflation hedge?

Find out 👇🏽

6/
That’s it, that’s the tweet.

Follow me @talkcentss for more monetary phenomenons.

Remember,

• Cost-push inflation
increase in costs

• Demand pull inflation
increase in aggregate demand

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