This primarily reflected an increase of 2.03% in the clothing and footwear index, mainly due to seasonally higher prices of garments. Higher prices of fruit and vegetables caused the food index to go up by 1.31%. The water, electricity, gas and fuels index registered a rise of 0.78% on account of higher gas prices. A rise of 0.30% was registered in the transport and communication index due to higher prices of fuels and motor vehicles.

a. What is the importance and relevance of data on the inflation rate for:

(i) Employers?

(ii) Employees?

b. Why is it necessary to have a representative basket of goods in order to measure inflation?

c. Distinguish between cost-push and demand-pull inflation, giving an example for each type.

d. How can the Central Bank / government assess whether a particular period of inflation was the result of cost-push or demand-pull inflation?

e. Many Central Banks try to keep inflation to a predetermined target level. What tool does the Central Bank use to control inflation if it rises above this target level?

f. Should the Central Bank increase or decrease interest rates during a period of high inflation? Why?