Push And Pull Inflation Analysis

According to www.investopedia.com/terms/i/inflation.asp Inflation basically “refers to the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling. This basically means that there is a sustained increase in the price level with the main causes of inflation being either excess aggregate demand (economic growth too fast) or cost push factors (supply-side factors).

Demand-pull inflation is when the economy is at or close to full employment, then an increase in aggregate demand (AD) leads to an increase in the price levels. As firms reach full capacity, they respond by putting up prices leading to inflation. Also, near full employment with labor shortages, workers

In order to really grasp this concept of inflation and ascertain its effectiveness, it is imperative to understand the pressure of rising due rapid economic growth or supply side factors. Online newspaper “Analysis: South Africa’s CPI reveals how volatile inflation hurts the poorest” shows that there is a positive correlation between inflation and interest rate risk. In other words Inflation and interest rates are linked, and frequently referenced in macroeconomics. In SA, interest rates are determined by the National treasury of South Africa (SA Treasury). Generally as interest rates are lowered, more people are able to borrow more money. The result is that consumers have more money to spend, causing the economy to grow and inflation to increase. The opposite holds true for rising interest rates. As interest rates are increased, consumers tend to save as returns are higher. With less disposal income to spend as a result of the increase in savings, the economy slows and inflation decreases. Interest rate levels are a factor of the supply and demand of credit as well: an increase in the demand for credit will raise interest rates, while a decrease in the demand for credit will decrease them. Conversely, an increase in the supply of credit will reduce interest rates while a decrease in the supply of credit will increase

Retirees are often greatly affected by inflation because many retirees live on a fixed income. While their pension income remains flat, prices rise. Consequently, their disposable income is reduced as day-to-day expenses consume an ever growing portion of their income. Wage earners experience the same problem if wages stay flat or if inflation outpaces wage increases. The inflation rate for the poorest consumers tends to be volatile because a high proportion of their expenditure is on food. Food prices, in turn, tend to be volatile because they reflect changes in soft commodity prices (for example wheat and maize), the rand and other factors such as current drought conditions. “Historically, when food prices have spiked the inflation rate for poor consumers has been higher than for rich