Saturday, 30 May 2015



During the next 40 years the world's population is projected to reach more than nine billion people.

Stes de Necker


During the next 40 years the world's population is projected to reach more than nine billion people. 

Demand for food is expected to increase by 60 percent under business-as-usual assumptions. 

Competition for land, water, and food could lead to greater poverty and hunger if not properly addressed now, with potentially severe environmental impacts. 

In the past century global agricultural production more than kept up with increasing demand and real food prices declined steadily, delivering better diets to most of the world's people. 

In the beginning of this century that long-term trend has been reversed with average prices increasing and more frequent price spikes.  And despite increasing abundance, hunger has remained a persistent problem for too many of the world's poor people. 

We now face a confluence of pressures on fragile soils, supplies of water, and competing demands for land. 

Climate change and rising demand for bio fuels provide additional instability in global food systems. 

Kostas Stamoulis, Director, Agricultural and Development Economics Division, FAO said recently, "We must renew efforts to address these challenges. But we in FAO and CGIAR must first help the international community to refocus our commitment to sustainable agriculture and the elimination of hunger in light of these changed circumstances.”

According to Karen Brooks, Director, PIM,   "Engaging key representatives of the research community, the private sector, civil society, donors, and others committed to food and nutrition security will help us all see the bigger picture of what is needed to set priorities and make the best decisions for research. We must try for sound targeting of our research given the enormity of the challenges and what is at stake for all of us, especially the world's poorest and most vulnerable."


Africa frequently experiences food shortages, although its 900 million farmers could feed the continent, as well as supplying other parts of the world. 

But for this to happen they need the support of politicians.

1.    The good news first

African governments, donors and the United Nations have rediscovered Africa’s agricultural sector. For almost two decades they concentrated on urban industrialization. Agriculture was insignificant.

Politicians only woke up following fluctuations on raw materials markets, coupled with a severe food crisis that began in 2008 and subsequent famine-driven rebellions. As a result the German Development Aid Ministry drew up strategy papers outlining a development policy that put the spotlight on agriculture.

In Africa some 900 million people, that’s 90 percent of the total population, work in the agricultural sector. It may not be a perfect comparison but who in Germany would come up with the absurd idea of halting the activities of small and medium-scale handicraft businesses, which guarantee millions of jobs and are a major factor in the country’s economy?

What can Africa’s agricultural sector achieve?

Agriculture means life. Every year one in eight people of the world’s population doesn’t have enough to eat. Most of those going hungry live in South Asia and in sub-Saharan Africa. These figures are alarming.

Can Africa feed itself, and then at some point in the future even provide food for a rapidly growing world?

More specifically, can Africa in the medium-term feed itself and then become a food exporter? This is only possible if local politicians and foreign donors work together.

2.    But here comes the bad news.

In many African countries, commitment to farming is no more than lip-service.

Conditions are lacking for farmers which would make it possible for them not only to fulfil their own needs but also to produce a surplus.

Take Ethiopia for example -nearly 85 percent of the country’s some 90 million people live from the land. But Ethiopia’s authoritarian government, in a show of Marxist nostalgia, still bans private land ownership

a.    Leasing land

Even land leases are uncertain. There is little incentive for farmers to invest in small plots of land to act as erosion protection. Instead they use expensive packets of seeds along with pesticides and herbicides, which in turn leach into the soil, trapping them in a vicious cycle of poverty when harvests are lost and debts increase.

b.    Commercial African banks do not give loans to farmers.

They cannot simply replace old wooden ploughs with modern equipment that would in-turn increase income many fold.

Even in the 21st Century many farmers are denied adequate access to markets, roads to the nearest marketplace are impassable in the rainy season. Studies show that up to 50-percent of African farmers fresh produce rots on the way to market – an unacceptable figure. And so the list goes on.

c. Industrialization in Africa, not possible without agriculture

It won’t take much to increase the productivity of farmers and in turn crop yields, says the DW report. Drip irrigation, crop rotation, seed finishing and organic cultivation are just keywords.

In an attempt to avoid any misunderstandings, it’s not about playing industrialization off against agriculture. But rather, one cannot exist without the other.

Industrialization in Africa must be vigorously promoted to ensure Ivorian cocoa beans are processed in Abidjan rather than Hamburg. At the same time African countries and their donors must meet to agree on a partnership for Africa’s food productivity.

The chances for such are good. After the uprising in Tunisia in 2011, that first ousted politicians then swept the winds of change across North Africa and the Arab world, Africa’s decision makers have been warned.

Hunger has become a political tool of the masses.

Europe’s politician’s have seen what desperation in Lampedusa and Malta’s refugee camps can trigger.

The time has come for a new deal for African agriculture.

Wednesday, 27 May 2015

FINANCIAL RATIOS - What are Financial Ratios and what are they used for


What are Financial Ratios and what are they used for

Stes de Necker

This article is for general information and should not be used or relied on as professional advice.
No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein.
The currency referred herein is the South African Rand and SARS means the South African Revenue Service. VAT means Value Added Tax.


The purpose of calculating ratios is to get a bird’s eye view of the financial situation of a business by analysing the relationships between different amounts on the financial statements. The major advantages of using ratio analysis are that it simplifies the information in the financial statements and allows you to compare the ratio results over time in a specific business, or between different businesses.

Some limitations of ratio analysis are the following:

There are no specific standards for what ideal ratios should be, so different people may interpret the same ratio in different ways.

Single ratios do not necessarily paint an accurate picture. Just like the meaning of a word can differ depending on the context of a sentence, a ratio must be interpreted in the context of the background of the business and the industry in which it operates.

Set out in the tables below are a number of financial ratios with their formulas and a brief explanation of what each ratio measures. 

1. Liquidity ratios (short term solvency ratios)

The liquidity ratios measure a business’s ability to pay off its current/short term liabilities i.e. the liabilities which will become due in the next 12 months.

Ratio name
Ratio formula
What it measures
Current ratio
Current assets / Current liabilities
Can the business pay their debts due in the next 12 months from the assets they expect to turn into cash within those 12 months? Generally a ratio of 1 or higher than 1 is considered acceptable.
Quick ratio (Acid test)
(Current assets –STOCK) / Current Liabilities
Can the business pay their debts due in the next 12 months from the cash and short term investments they have? Stock is excluded from the ratio as it must still be converted to a liquid asset (debtor/cash).Generally a ratio of 1 or higher than 1 is considered acceptable.

2. Efficiency ratios

Efficiency ratios show how efficient a business is in using its investment in current assets to make a profit.
Ratio name
Ratio formula
What it measures
Debtor days (A)
Average trade debtors* / Sales x 365
Average number of credit days clients take to pay their accounts. If the number of days are high, especially higher than the industry average, it can indicate problems with debt collection.
Stock days (B)
Cost of sales / Average stock**
Average number of days it took from receiving stock to selling the stock. If the stock days are higher than the average stock days for the industry, it can indicate poor stock management, for example, having too much money tied up in stock.
Creditor days (C)
((Trade creditors + accruals) / (Cost of sales + other purchases)) x 365
Average number of days it takes from purchasing from a supplier until paying their account. If the creditor days are very short, it may indicate that the business is not taking full advantage of trade credit available to it.
Cash conversion cycle (CCC)
Debtor days +STOCK days – Creditor days OR
(A) + (B) – (C)
How fast a business turns stock into sales (debtors), then turn those sales (debtors) into cash by collecting what the debtors owe them, and then pay its suppliers for goods and services bought from them. The shorter the CCC, the better. This will mean:
Better liquidity,
Smaller need to borrow money,
Money available to make use of discount terms for cash payments to creditors,
Better capacity to fund expansion of the business.
*Average trade debtors = (Debtors’ opening balance + Debtors’ closing balance)/2
**Average stock = (Stock opening balance + Stock closing balance)/2


The purpose of ratio analysis is to simplify the financial situation of a business by looking at the relationships between different categories of accounting data.

The amounts used in ratio analysis will normally be read from a set of financial statements.

Two important limitations of ratio analysis which must be kept in mind are:

Two people can interpret the same ratio result very differently as there are no fixed guidelines on how the results of ratios must be interpreted.

The same result of a specific ratio can be excellent in one industry, but fatal in another industry. It is crucial to interpret a ratio within the context of the circumstances of the business and the industry it operates in, as well as general market conditions.

The first article in the series on financial ratios dealt with liquidity (short-term solvency) ratios and efficiency ratios. This article will discuss profitability ratios, return on investment (ROI) ratios and operating efficiency (OE) ratios.

A. Profitability ratios

Profitability ratios measure if a business is making a profit or a loss, and whether the ratios are acceptable or not. The rule of thumb is the higher the return, the better the business is at controlling its costs.

Financial ratio
What this ratio measures
Gross Profit margin
Gross profit / Net sales x 100 = x%
The percentage of each rand of sales that is left over, after deducting cost of inventory sold, for paying expenses and making a profit
Net profit margin
Net profit after tax / Net sales x 100 = x%
The percentage of each rand of sales, after all expenses have been paid, that will be left as profit

B. ROI ratios

ROI ratios are used to calculate the return on an investment made in a business or an asset. The general rule is that the higher the return, the more profitable the investment.

Financial ratio
What this ratio measures
Return on assets
Net profit after tax / Average total assets* x 100 = x%
The average percentage of profit after tax that was made on the business’s investment in total assets
Return on equity
Net profit after tax / Average owner’s equity** x 100 = x%
The average percentage of profit after tax that was made on the owner’s investment in the business
*Average total assets = (Opening long-term assets + Opening short-term assets + Closing long-term assets + Closing short-term assets) / 2
**Average total equity = (Opening equity + Closing equity) / 2

C. OE ratios

The result of operating efficiency ratios gives an idea of how efficiently a business is using its total investment in resources. Generally, the bigger the result of the ratio, the more efficient the business is at generating income from its assets and equity investments from its owner(s).

Financial ratio
What this ratio measures
Net working capital turnover
Sales / Average net working capital^
How many rands of sales are generated for each rand of net working capital
Fixed asset turnover
Sales / Average net fixed assets^^
How many rands of sales are generated for each rand of net fixed assets
Total asset turnover
Sales / Average total assets^^^
How many rands of sales are generated for each rand invested in the assets of the business
Equity turnover
Sales / Average total equity^^^^
How many rands of sales are generated for each rand invested by the owner(s) in the business

^Average net working capital = (Opening net working capital + Closing net working capital) / 2
^^Average net fixed assets = (Opening net fixed assets + Closing net fixed assets) / 2
^^^Average total assets = (Opening assets + Closing assets) / 2
^^^^Average total equity = (Opening equity + Closing equity) / 2

All the above ratios deal in some way or another with how efficient a business is at managing its expenses, income and assets. Remember to interpret all financial ratios against the backdrop of the business’s unique circumstances, taking into account the industry the business operates in and the market conditions for that industry.

VAT: The difference between standard-rated, zero-rated and exempt supplies

There are three categories of supplies that can be made by a VAT vendor: standard-rated, zero-rated and exempt supplies. Output tax must be levied on all supplies except exempt supplies. The VAT Act gives specific guidelines for zero-rated and exempt supplies but these fall outside the scope of this article. Please contact your tax practitioner for more information.

The following simplified formula is used to calculate the amount of VAT that a registered VAT vendor have to pay to SARS or can claim as a refund from SARS:

Output VAT levied on standard-rated and zero-rated supplies* – Input VAT claimed on qualifying expenses = Net VAT due to/(refundable by) SARS.

* A supply is defined as the provision of a product or service by a VAT vendor in return for payment in cash or otherwise.

I. Standard-rated supplies

Standard-rated supplies are supplies of goods and services on which output VAT is levied at a rate of 14%. The input VAT incurred on purchases of goods and services to generate standard-rated supplies can be deducted from output VAT payable to SARS.

Example 1:

XYZ Manufacturers manufactured inventories at a cost of R7 000 (VAT included).
The inventories were sold for R10 000 (VAT included).
All inventory sales qualify as standard-rated supplies.
Net VAT due to/(refundable by) SARS will be calculated as follows:
Output VAT levied on standard-rated supplies (R10 000 x 14/114)
R1 228
Less: Input VAT on purchases to make standard-rated supplies (R7 000 x 14/114)
(R    860)
Net VAT due to/(refundable by) SARS
R   368

II. Zero-rated supplies

Zero-rated supplies are supplies of goods and services on which output VAT is levied at a rate of 0%. The input VAT incurred on the purchase of goods and services to generate zero-rated supplies can be claimed against output VAT payable to SARS.

Example 2:

XYZ Manufacturers manufactured inventories at a cost of R7 000 (VAT included).
The inventories were sold for R10 000 (VAT included).
All inventory sales qualify as zero-rated supplies.
Net VAT due to/(refundable by) SARS will be calculated as follows:
Output VAT levied on zero-rated supplies (R10 000 x 0/114)
R     nil
Less: Input VAT on purchases to make zero-rated supplies (R7 000 x 14/114)
(R   860)
Net VAT due to/(refundable by) SARS
(R   860)

III. Exempt supplies

Exempt supplies are not subject to VAT. No output VAT, either at 14% or at 0%, is levied on exempt supplies. Input VAT incurred on expenses to make exempt supplies cannot be claimed against output VAT due to SARS.

Example 3:

XYZ Manufacturers manufactured inventories at a cost of R7 000 (VAT included).
The inventories were sold for R10 000.
All inventory sales are exempt supplies for VAT purposes.
Net VAT due to/(refundable by) SARS will be calculated as follows:
Output VAT levied on exempt supplies
R nil
Less: Input VAT on expenses incurred to make exempt supplies
(R nil)
Net VAT due to/(refundable by) SARS
R nil
Combination of standard-rated, zero-rated and exempt supplies
Where a VAT vendor makes standard-rated supplies and/or zero-rated supplies and/or exempt supplies, input VAT must be apportioned in the same ratio as the three different types of supplies stand to each other.

Example 4:

ABC Distributors made the following supplies for VAT purposes (VAT included where applicable):
Standard-rated supplies
R  60 000
Zero-rated supplies
R  10 000
Exempt supplies
R  30 000
Total supplies
R100 000
2. Expenses incurred in the making of total supplies amounted to R85 000 (VAT included).
Net VAT due to/(refundable by) SARS will be calculated as follows:
Pro rata Output VAT levied on standard-rated and zero-rated supplies
[(60 000 x 14/114) + (R10 000 x 0/114)]
Output VAT on exempt supplies
  R7 368

R      nil
Less: Apportioned input VAT on expenses to make standard-rated and
zero-rated supplies [(R85 000 x 60% x 14/114) + (R85 000 x 10% x 14/114)]
Less: Apportioned Input VAT on exempt supplies
(R7 307)

R      nil
Net VAT due to/(refundable by) SARS
 R       61

Accounting software can be set up so that VAT is automatically recorded correctly for standard transactions. However, a computer programme will not be able to classify unique transactions for VAT purposes. Therefore it is still important that accounting staff is trained to handle VAT correctly, especially where grey areas exist.


Ratio analysis can be used when financial information needs to be simplified to make it possible to interpret and compare the information. Banks often do ratio analysis when they need to decide whether to lend money to a client or not. If a business wants to open an account with a supplier, the suppliers often use ratio analysis to determine the financial health of the business before deciding if they will sell to the business on credit.

There are also other advantages to making use of ratio analysis.

Some of these advantages are:

·         Ratios simplify the relationships between different amounts in a way that is easy to understand.

Ratio analysis allows the user to get a bird’s-eye view of the changes that have taken place in the financial condition of a business.

Ratio analysis makes it easier to compare different businesses with each other.

Comparisons can be made in the same business, between different years or divisions, to monitor the efficiency and performance of business units.

Ratio analysis can be used in planning by using past ratios to forecast future financial situations e.g. when drawing up a budget. 
Financial risk ratios

Financial risk ratios, also known as solvency ratios, are used to determine the long term financial health of a business by determining whether the business carries too much or too little debt.

1. Debt ratio (also known as gearing):
Formula: Liabilities/Assets
A business can finance its assets with capital from the owner(s) or money borrowed from a bank or similar institution. The debt ratio determines the proportion of the assets of a business that are financed through debt, e.g. a debt ratio of more than 0.5 means more than half of the business’s assets are financed through debt. A debt ratio of less than 0.5 means most of the business’s assets are financed through capital (equity).

2. Equity ratio:
Formula: Equity/Assets
The equity ratio is a variant of the debt ratio above. The equity ratio shows the proportion of the assets of a business that are financed through equity.

3. Times interest earned (Interest cover):
Formula: Profits before interest paid and income tax / Interest paid
This ratio indicates whether a business will be able to make the interest payments on its debts from its profits. For example, a ratio of 2.5:1 means that the business earns two and a half times the amount that is needed to cover its interest expense.

4. Free cash flow ratio:
Formula: Cash flow from operating activities – Capital expenditure
The free cash flow ratio gives the amount of cash from operations that is left after a business paid for its capital expenditure. This is the amount of cash that is available to repay loans to banks and loans from the owner(s) to the business, and to make investments.

5. Cash flow coverage ratio:
Formula: Operating cash flows / Total debt
Banks often look at this ratio when they have to decide if they will make a loan to a business as this ratio tells if a business will be able to make capital and interest payments on loans when they become due.
A ratio of 1:1 means the business is in a good liquidity position or in good financial health. A ratio of less than 1 implies that the business does not earn enough profits to be able to pay capital and interest out of its earnings. If a business has a ratio of less than 1, there is a good chance of bankruptcy within the next few years if the business does not do something to improve its financial position.

The above ratios are used to give an indication of the financial health of a business. It is however important to remember that different industries have different norms and what is interpreted as a problematic ratio in one industry, can be perfectly acceptable in another industry.

Monday, 25 May 2015




Stes de Necker

Ask anyone to locate the one acupressure point that they’re aware of and inevitably they will show you the web between their thumb and forefinger and proudly state that location is perfect to push on to get rid of a headache.

This point works for headaches, as well as number of other ailments, many of which strike athletes in particular. 

First and foremost, let’s locate the point accurately.

The actual anatomic description of location reads as follows, “On the dorsum of the hand, between the first and second metacarpal bones, approximately in the middle of the second metacarpal bone on the radial side.” 

In layperson language speak; the best way to find the “actual” point location is to find where your thumb and pointer finger meet towards the base of your wrist. 

Once you’ve located that area, slide your finger along the bone of your pointer finger about a half an inch towards the tip and then come out off of that bone towards your thumb. (Another easy way to find the exact location of is to squeeze your thumb into your index finger and the top of the “lump” created by the web is your spot.) 

The point itself is about as big as a nickel so don’t feel that you need to be pinpoint accurate in finding it. You can see in the photos where the point lies. 

The “Hegu” as the point is called in Chinese can be massaged for any issue related to the head and face, including: 


Sinus Infections


Redness and swelling of the eyes

Swelling or puffiness in the face

Secondly, this point can be used in practice for any pain condition in the body.  

For a patient with knee pain, then this point should be in conjunction with other points around the knee. The same thing will happen with pain anywhere else in the body.  

Although you’re not going to be inserting needles into yourselves, this point is still highly effective with acupressure as well.

Using your thumb and forefinger of the opposite hand, squeeze this area until you feel a mild discomfort.

Continue to hold that pressure for 20 – 30 seconds and then release. Repeat as often as necessary throughout the day until you feel that you have evoked a change in the condition from which you are suffering.

This is a fantastic combination to add to your ice, heat and stretching regimen, especially when dealing with an injury or ailment. 

The only caution that comes with the point is that it is contra-indicated in pregnancy due to its ability to promote labor.

A Point of a Hundred Diseases on Your Body What happens when you massage this point

A Point of a Hundred Diseases on Your Body

Stes de Necker

One Japanese legend says that, once upon a time there lived a happy man who received priceless knowledge from his father – the knowledge of the longevity point or a point of a hundred diseases.

Following the advice of his father, the son massaged this point every day and he lived to see the birth and death of several emperors.

The massaging of some points is one of the oldest methods of treatment in the East, which has been used for thousands of years.

Overall, the human body has 365 points and 12 main meridians, which is the same as the number of the days and months in one year.

The effects of these massages (acupressure, finger pressure to certain points), is based on the theory of the meridians and channels that are connected to certain organs.

In Chinese medicine, the body is seen as an energy system, and therefore, the massage can affect the flow of energy and the functional activity of the organs.

The activation of the Zu San Li point causes a permanent rejuvenating and healing effect, delaying of the aging.

In China, this point is known as – “the point of longevity” in Japan – “the point of a hundred diseases”.

Where is the magic point (Zu San Li) in our body?

The point of longevity is located below the kneecap.

In order to find it, you should cover your knee with the palm of the same hand. The point is located between the ends of the little finger and ring finger, in the form of a small dent between the bones.

You can find in another way as well.

You have to sit on the floor, firmly press your feet to the floor and pull them towards you, do not raise your heels from the floor.

You will notice that below the knee there is a higher area. Find the highest point, put your finger on it and take a starting position.

The point at which you pressed your finger is the point – Zu San Li.

What is this point in our body responsible for and why do the Japanese call it – A point of a hundred diseases?

– It controls the work of the organs that are located in the lower half of the body
– It controls the work of the spinal cord in the parts that are responsible for the proper functioning of the gastrointestinal tract, digestion tract, genital organs, kidneys, adrenal glands.

By massaging the Zu San Li point you can increase the activity of the adrenal glands, the most powerful glands that act as the main defender of human health.

They excrete adrenaline, hydrocortisone and other important hormones into the blood.
If you massage “the point of longevity” every day, you can normalize the work of the adrenal glands, which perform the following functions in the organism:

– Normalization of the blood pressure

– Normalization of the glucose, the insulin

– Elimination of the inflammatory processes in the organism

– Regulation of the immune system

Also, by massaging the Zu San Li point, you can:

– Improve digestion

– Heal diseases of the gastrointestinal tract

– Treat the effects of a stroke

The massaging of this point will help you to increase your confidence, eliminate the stress and tension and find inner harmony.

By massaging this point, you can cure many diseases, including hiccups, constipation, gastritis, incontinence.

How can you affect the “point of longevity”?

It is better to massage the Zu San Li point in the morning, before lunch, 9 times in a circular motion in a clockwise direction on each leg (9 times on one and nine times on the other leg).

You should do this for 10 minutes.

Before the beginning of the massage you should take a comfortable, relaxed position (sitting). Calm the breathing and concentrate yourselves on your feelings. Place yourselves in a state of harmony and understanding that you are beginning the healing process. This massage has a stimulating effect.

You can massage the point with your fingers or with any grain (buckwheat, oats, rice, etc …).

Also, you can stick to this point a half of a garlic clove and leave it on for 1-2 hours (until the skin turns red).

The massaging of the Zu San Li point in the evening is suitable for weight loss – they say, 400 to 500 grams per week. But do not massage it directly before bedtime, because you can cause insomnia.

– Before lunch, alternately on each leg, in the clockwise direction, in order to improve the overall tone, the memory, the work of the cardiovascular system and the digestive system.

– After lunch, simultaneously on both legs – against stress, nervousness and irritability, against headaches and sleep disorders.

In the evening, massage it in the counter clockwise direction, alternately on each leg, in order to improve the metabolism and help the weight loss.

Friday, 22 May 2015




Stes de Necker

In economics, inflation is a sustained increase in the general price level of goods and services in an economy over a period of time.

When the price level rises, each unit of currency buys fewer goods and services. Consequently, inflation reflects a reduction in the purchasing power per unit of money – a loss of real value in the medium of exchange and unit of account within the economy.

A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the consumer price index) over time. 

The inflation rate is widely calculated by calculating the movement or change in a price index, usually the consumer price index.

The inflation rate is the percentage rate of change of a price index over time. The Retail Prices Index is also a measure of inflation that is commonly used in South Africa. It is broader than the CPI and contains a larger basket of goods and services.

South Africa Inflation Rate 1995:

South Africa Inflation Rate 2015-05-22:

Other price indices used for calculating price inflation include the following:

·        1. Producer price indices (PPIs) which measures average changes in prices received by domestic producers for their output.

This differs from the CPI in that price subsidization, profits, and taxes may cause the amount received by the producer to differ from what the consumer paid. There is also typically a delay between an increase in the PPI and any eventual increase in the CPI.

Producer price index measures the pressure being put on producers by the costs of their raw materials. This could be "passed on" to consumers, or it could be absorbed by profits, or offset by increasing productivity. In India and the United States, an earlier version of the PPI was called the Wholesale Price Index.

·        2. Commodity price indices, which measure the price of a selection of commodities. In the present commodity price indices are weighted by the relative importance of the components to the "all in" cost of an employee.

·        3. Core price indices: because food and oil prices can change quickly due to changes in supply and demand conditions in the food and oil markets, it can be difficult to detect the long run trend in price levels when those prices are included. Therefore most statistical agencies also report a measure of 'core inflation', which removes the most volatile components (such as food and oil) from a broad price index like the CPI. Because core inflation is less affected by short run supply and demand conditions in specific markets, central banks rely on it to better measure the inflationary impact of current monetary policy.

Before collecting consistent econometric data became standard for governments, and for the purpose of comparing absolute, rather than relative standards of living, various economists have calculated imputed inflation figures.

Most inflation data before the early 20th century is imputed based on the known costs of goods, rather than compiled at the time. It is also used to adjust for the differences in real standard of living for the presence of technology.

Asset price inflation is an undue increase in the prices of real or financial assets, such as stock (equity) and real estate. While there is no widely accepted index of this type, some central bankers have suggested that it would be better to aim at stabilizing a wider general price level inflation measure that includes some asset prices, instead of stabilizing CPI or core inflation only. 

The reason is that by raising interest rates when stock prices or real estate prices rise, and lowering them when these asset prices fall, central banks might be more successful in avoiding bubbles and crashes in asset prices.

Inflation affects an economy in various ways, both positive and negative.

Negative effects of inflation include an increase in the opportunity cost of holding money, uncertainty over future inflation which may discourage investment and savings, and if inflation were rapid enough, shortages of goods as consumers begin hoarding out of concern that prices will increase in the future.

Inflation also has positive effects:

·        Fundamentally, inflation gives everyone an incentive to spend and invest, because if they don't, their money will be worth less in the future. This spending and investment can benefit the economy.

·        Inflation reduces the real burden of debt, both public and private. If you have a fixed-rate mortgage on your house, your salary is likely to increase over time due to inflation, but your mortgage payment will stay the same. Over time, your mortgage payment will become a smaller percentage of your earnings, which means that you will have more money to spend.

·        Inflation keeps nominal interest rates above zero, so that central banks can reduce interest rates, when necessary, to stimulate the economy.

·        Inflation reduces unemployment the extent that unemployment is caused by nominal wage rigidity

      When demand for labour falls but nominal wages do not, as typically occurs during a recession, the supply and demand for labour cannot reach equilibrium, and unemployment results. By reducing the real value of a given nominal wage, inflation increases the demand for labour, and therefore reduces unemployment.

Economists generally believe that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply. However, money supply growth does not necessarily cause inflation.

Some economists maintain that under the conditions of a liquidity trap, large monetary injections are like "pushing on a string".

Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities.

However, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth.

Today, most economists favour a low and steady rate of inflation. Low (as opposed to zero or negative) inflation reduces the severity of economic recessions by enabling the labour market to adjust more quickly in a downturn, and reduces the risk that a liquidity trap prevents monetary policy from stabilizing the economy. The task of keeping the rate of inflation low and stable is usually given to monetary authorities.

Generally, these monetary authorities are the central banks that control monetary policy through the setting of interest rates, through open market operations, and through the setting of banking reserve requirements.

Historically, a great deal of economic literature was concerned with the question of what causes inflation and what effect it has. There were different schools of thought as to the causes of inflation.
Most can be divided into two broad areas: quality theories of inflation and quantity theories of inflation.

The quality theory of inflation rests on the expectation of a seller accepting currency to be able to exchange that currency at a later time for goods that are desirable as a buyer.

The quantity theory of inflation rests on the quantity equation of money that relates the money supply, its velocity, and the nominal value of exchanges. 

Adam Smith and David Hume proposed a quantity theory of inflation for money, and a quality theory of inflation for production.

Currently, the quantity theory of money is widely accepted as an accurate model of inflation in the long run. Consequently, there is now broad agreement among economists that in the long run, the inflation rate is essentially dependent on the growth rate of money supply relative to the growth of the economy. However, in the short and medium term inflation may be affected by supply and demand pressures in the economy, and influenced by the relative elasticity of wages, prices and interest rates.

The question of whether the short-term effects last long enough to be important is the central topic of debate between monetarist and Keynesian economists.

In monetarism prices and wages adjust quickly enough to make other factors merely marginal behaviour on a general trend-line. 

In the Keynesian view, prices and wages adjust at different rates, and these differences have enough effects on real output to be "long term" in the view of people in an economy