Macroeconomics Pietermaritzburg Agency

Question: Describe about the Macroeconomics for Pietermaritzburg Agency. Answer: Introduction : South Africa is facing a high inflation rate from the last three months. The food prices have been increased by eight times more than the previous years. The main reason behind this is the drought and the depreciation of money. The Pietermaritzburg Agency for Community Social Action (Pacsa) has done a research on 36 main food items in KwaZulu-Natal. These goods were mainly consumed by the lower-income households of the city. According to their report, the price of the food items increased by 9% compared to past three months. The inflation rate was moderate in 1994, and then it gradually increases. The objective of the assignment is to discuss about the inflation rate prevailing in South Africa. To analyze the role of the monetary authority regarding this problem is another objective of this study (Amusa et. al., 2013). Analysis : Inflation is a method in which the general price level is rising for a considerable period of time. In this process, money loses its value. In other words, the inflation rate is defined as the percentage change in the price level. Inflation rate = 100 where P1 is the price level of previous year and P2 is the price level of the current year. There are two types of inflation occurred in the economy, cost-pull inflation and demand-pull inflation. Cost-pull inflation causes due to the supply side effects of the economy such as the external economic shocks whereas demand-pull inflation occurs due to the demand side effects of the economy. South Africas inflation targeting regime : In this assignment, the article Food prices to soar as drought bites has been chosen for further analysis. According to the newspaper article, a food company has already given a notice to the retailers that they have anticipated 8%-10% price increase of their product. The poor households are using the strategy to reduce the amount of food but it leads to a deterioration of their health. The inflation rate was very higher in the beginning of 2016. The figure 1 describes the inflation rate of South Africa from July, 2015 to April, 2016 (Aron, 2014). Figure 1: Inflation rate in South Africa ( Source: created by author ) Figure 1 describes the inflation rate in South Africa from the time period July, 2015 towards. The diagram depicts that the inflation rate was very low in the month of July, 2015 but then it gradually increases from the beginning of 2016. It reached the maximum level in February of this year. Role of the monetary authorities to control the inflation rate : According to Balcilar, Uwilingiye, Gupta, (2014) the monetary policy is defined as the strategies taken by the monetary authorities to control the rate of interest or amount of money with the objective of controlling inflation and achieving full employment situation. South African Reserve Bank controls the monetary policy of this country. The monetary authorities take various policies to control the inflation rate such as the repo rate. It is defined as the rate at which the South African Reserve Bank grants loan to the banks and thus it indicates a cost of credit to the commercial banks. When the Reserve Bank changes the repo rate, then the interest rate on loans is also changed. Thus the monetary authorities control the inflation rate. In 2016, the inflation rate was very higher. It means that the monetary authorities were failed to control the inflation rate ( Plessis, Rand, Kotz, 2015). Impact of the drought and the weak exchange rate on food prices : According to Simo-Kengne et. al., (2013), the drought and the weak currency rate would raise the food prices. The prices of both white and yellow maize increased in 2015. Also the prices of some other crops were increased leading to food price inflation. Zambias crop has also been adversely affected by the droughts. Moreover, agricultural sectors export was severely affected by the inflation. This is the impact of inflation on the agricultural sector. The households often change their spending patterns due to rise in prices. Sometimes, they switch to cheaper varieties and reduce the quantities of their consumption basket. The Consumer price Index ( CPI ) is sometimes failed to show the actual inflation situation. Some researchers have shown that the CPI indicates the situation of the working or the middle class better, rather than the poorer sections of the society (Gupta Hartley, 2013). The impact of the drought and weak exchange rate on economic growth/ agricultural sector : According to Narayan Narayan, (2013) the drought has affected the agricultural productivity adversely in South Africa. It has a negative impact on both the crop and livestock farming. This leads to the problems like food security, poverty and unemployment. There has been a significant loss in maize exports. Moreover, due to the combined effect of the drought and the weak exchange rate, the annual food inflation, measured by the CPI index, was almost 7% in this year. The growth rate of South Africa has reflected a downward trend in this year due to the severe inflation rate. The GDP has reduced by 1.2% in this year. Moreover, due to the inflation, the interest rate would be higher and there will be lower exports of goods. It will then reduce the investments of South Africa ("Southern Africa and the Economics of Drought | Access Africa", 2016). Conclusion: This part of the assignment sums up the entire thing. The first part of the assignment introduces the inflation of South Africa. According to a newspaper report, it is found that now the price of the food items has increased by 9% compared to the last three months. Then the role of the monetary authorities is discussed in this regard. The drought and the weak exchange rate have a negative consequence on the food prices and exports. Moreover, the higher inflation rate also lowers the growth of the economy. It can be concluded that there is a link between the inflation, unemployment and economic growth. Reference list: Amusa, K., Gupta, R., Karolia, S., Simo-Kengne, B. D. (2013). The long-run impact of inflation in South Africa.Journal of Policy Modeling,35(5), 798-812. Aron, J., Farrell, G., Muellbauer, J., Sinclair, P. (2014). Exchange rate pass-through to import prices, and monetary policy in South Africa.Journal of Development Studies,50(1), 144-164. Balcilar, M., Uwilingiye, J., Gupta, R. (2014).Dynamic Relationship between Oil Price and Inflation in South Africa(No. 201430). Gupta, R., Hartley, F. (2013). The role of asset prices in forecasting inflation and output in South Africa.Journal of Emerging Market Finance,12(3), 239-291. Narayan, S., Narayan, P. K. (2013). The inflationoutput nexus: Empirical evidence from India, South Africa, and Brazil.Research in International Business and Finance,28, 19-34. Plessis, S., Rand, G., Kotz, K. (2015). Measuring core inflation in south africa.South African Journal of Economics,83(4), 527-548. Simo-Kengne, B. D., Balcilar, M., Gupta, R., Reid, M., Aye, G. C. (2013). Is the relationship between monetary policy and house prices asymmetric across bull and bear markets in South Africa? Evidence from a Markov-Switching Vector Autoregressive model.Economic Modelling,32, 161-171. Southern Africa and the Economics of Drought | Access Africa. (2016). Access-africa.org. Retrieved 24 August 2016, from https://access-africa.org/southern-africa-and-the-economics-of-drought/