## Two per cent inflation also erodes real value

April 30, 2012 in Uncategorized

**Two per cent inflation also erodes real**

value

value

inflation are not more harmful than zero per cent inflation. This school of thought is

incorrect in two of the three valuation processes in our current HC economy and

would also be mistaken in one of the three valuation processes under continuous

financial capital maintenance in units of constant purchasing power, i.e., the

Constant Item Purchasing Power paradigm during low inflation. The three valuation processes in our economy

under both the HC and CIPP paradigms are the valuation of monetary, variable and

constant items.

paradigms with the stable measuring unit assumption being applied under HCA. The

stable measuring unit assumption is never implemented under the CIPP paradigm.

The two paradigms are fundamentally different

paradigms.

rate of up to two per cent per annum is completely unharmful and that it has no disadvantages compared to

absolute price stability is never true in the case of monetary items under any accounting

model, either the HCA model or the CIPPA model, since inflation always erodes

the real value of monetary items. A high degree of price stability of two per

cent per annum in this case erodes two per cent per annum of the real value of

money and other monetary items which equates to the erosion of 51 per cent of

real value in all current monetary items over the next 35 years. It will over a

long enough time period lead to all current monetary items arriving at the point

of being completely worthless in economies with continuous two per cent

inflation. The five cents coin was recently withdrawn from the South African

money supply since it was practically worthless. South Africa has an inflation

target of three to six per cent per annum. Swedish rounding whereby the cost of a purchase

paid for in cash is rounded to the nearest multiple of the smallest denomination

of currency is implemented in a number of countries.

those who assume that a high degree of price stability of above zero and up to

two per cent per annum is unharmful in all respects and that it has absolutely

no disadvantages compared to absolute price stability or zero

inflation.

has no disadvantages compared to zero inflation is acceptable in the case of

variable real value non–monetary items valued continuously in terms of IFRS

(excluding the stable measuring unit assumption) under the CIPPA model. The

nature of the valuing processes in valuing variable real value non–monetary

items continuously, for example, at fair value or the lower or cost and net

realizable value or market value, etc., in terms IFRS (excluding the stable

measuring unit assumption), allows this idea to be justifiable under

CIPPA.

any level of inflation or deflation – high or low – is automatically adjusted

for in determining the price of a variable real value non–monetary item at the

moment of a transaction in terms of IFRS, excluding valuation in nominal

monetary units, under CIPPA.

under the HC model with the valuation of variable items in terms of IFRS accept

in the case where the stable measuring unit is implemented. It is thus not

acceptable

*per se*with reference to

variable items under the HC paradigm.

cent over 35 years – of the real value of constant real value non–monetary items

never maintained, e.g., retained profits, etc. under the current HC paradigm. The only

constant items generally maintained constant with annual measurement in units of

constant purchasing power under the HC paradigm are certain (not all) income

statement items, e.g., salaries, wages, rentals, etc. They are, however, paid

monthly at the same value after being updated annually. All existing constant

real value non–monetary items´ real values would automatically be maintained

constant with continuous measurement in units of constant purchasing power at

any level of inflation or deflation under the CIPP paradigm for an unlimited

period of time in entities that at least break even in real value –

*ceteris*

paribus.

paribus.

non–monetary items under the HC paradigm too, that the effects of two per cent

inflation is completely unharmful. Two per cent inflation – in fact, any level

of inflation or deflation – would be the same as zero inflation as far as the

valuation of constant real value non–monetary items under the CIPPA model is

concerned.

Nicolaas Smith

Copyright (c)

2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without

permission.

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