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The impact of higher inflation

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Founder and director of financial and investment education website JustOneLap.com, Simon Brown.
Founder and director of financial and investment education website JustOneLap.com, Simon Brown.

I have written before how the South African Reserve Bank (SARB) governor Lesetja Kganyago has always referred to the inflation target as 4.5%. He never mentions the 3% to 6% range which the bank officially targets and there is a simple reason for this: inflation expectations.

Expectations of consumer price inflation is almost as important as the actual rate. If you think inflation is going to be much higher in the year ahead, you will buy big ticket items now (if the budget allows), rather than waiting a year. This then sends inflation higher as it pulls some of next year’s demand into this year and more demand relates to higher prices.

Bringing this to the now, in the US the big debate is whether the current higher-than-5%inflation is transitory or not? My initial expectation was that it was transitory due to the base effect as well as some distortions such as used vehicle prices skyrocketing due to less new vehicles pushing up demand for used vehicles. Of course, the fear of rising used vehicle prices also pulled forward some demand, pushing prices even higher.

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