2.7 Read the extract below and answer the questions that follow.

How Russia's War in Ukraine is Pushing Up Prices in South Africa

Russia's invasion of Ukraine and tightening sanctions on Russia have sent commodity prices soaring, and will have adverse implications for South Africa's Consumer Price Index (CPI), says senior economist at Absa CIB, Peter Worthington. The invasion has directly led to higher oil and grain prices, which directly push up prices of key goods within the CPI such as fuel and bread.

2.7.1 Explain what the Consumer Price Index is and how it is measured. (2 + 2) (4)

2.7.2 Analyze how Russia's invasion of Ukraine affects inflation and the impact it will have on South African consumers.

The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. Prices are collected periodically, and the items in the basket are reviewed periodically to reflect spending habits.

The formula to calculate the CPI is:
[tex]\text{CPI} = \frac{\text{Cost of Basket in Current Year}}{\text{Cost of Basket in Base Year}} \times 100[/tex]

2.7.2 Analysis of How Russia's Invasion of Ukraine Affects Inflation in South Africa:

Russia's invasion of Ukraine has significant implications for the global economy, including South Africa. Since Russia and Ukraine are major exporters of commodities like oil and grain, any disruption in their supply due to the conflict can lead to an increase in the global prices of these commodities.

Oil and Fuel Prices: The conflict leads to uncertainty and disruptions in oil supplies, causing oil prices to rise globally. This impacts South Africa because it imports oil, and higher oil prices result in increased fuel costs for consumers.
Grain Prices: Ukraine is a significant producer of grains. Conflict can reduce the supply, leading to increased grain prices worldwide. For South Africa, this translates to higher prices for products like bread and other grain-based foods.

Overall, these increases in commodity prices contribute to rising inflation. Inflation occurs when the general level of prices increases, which reduces the purchasing power of money. For South African consumers, this means they need to spend more money to buy the same amount of goods and services, which can decrease their overall standard of living.