The news is filled with terms like inflation, interest rates and debt relief, my bank account shrinks just thinking about it.
South Africa’s economy is worrying
I know something bad is happening to my money, but I am not really sure what it is and I can’t be bothered to read the Business Section in the newspaper. BUT, in our country’s economic situation, consumers like you and me are bearing the brunt of an economy that is out of whack.
Be warned your retail therapy budget may be at risk.
So, inflation is defined as a continual increase in the overall level of the prices of goods and services. This is normally reported as an annual percentage by the South African Reserve Bank.
As inflation increases each Rand is worth less
Know that the value of a Rand changes with inflation, as inflation increases each Rand is worth less, buying you a smaller percentage of that item.
For example, if you buy a trolley full of groceries for R450 and inflation this year is 6.43%, so per purchase you are paying on average, 6.43% more than last year, i.e. R29,25.
If you shop twice a month for a year, that extra amount comes to R702, not an insignificant amount.
Salaries should go up each year to match inflation – BUT do they?
Of course, your salary should go up each year to match inflation (at least), so that you can keep up with the rising costs of essential goods, such as bread, milk and butter.
But this is often not the case, your salary or income may not be in sync with inflation, which means that each year you may earn less (that R702 may rise to R918, at 8.5%).
This puts pressure on your pocket and can suppress your quality of life.
Be aware of how inflation affects you
It is important to remember, however that inflation, when properly accommodated by businesses and banks, is a positive indication that economy is growing.
The percentage of inflation varies over time and can also decrease (deflation) or stabilise (stagnation). If inflation increases unusually quickly over a short period it is known as hyperinflation. In South Africa’s case, the effects of the Marikana strikes led to hyperinflation in our economy during the first half of 2014. It is the job of SARB to determine the country’s inflation and determine how interest rates should be adjusted to maintain a sustained inflation and protect consumers and businesses alike.
Why does inflation exist?
Inflation arises from the complex interplay of market forces;
Economists still don’t know exactly how it comes about. They aren’t clueless though, and have some extensive theories on how inflation develops on both micro and macro scales. But for us simpletons, inflation is basically a measure of an economy’s stability and growth.
This happens when the demand for goods is greater than the supply, so the price of goods goes up because sellers can afford to increase their profit margins. This is normally a mark of economic growth.
An example of this would be rising fuel prices in accordance with the increasing price of crude oil due to its high demand and the fact that it is a non-reusable staple resource for most countries.
This occurs when the cost of buying, importing or manufacturing goods goes up, so sellers put up their prices to maintain their profit margins.
This can cause taxes to increase as the public bear the burden of such changes. However, wages are supposed to increase accordingly with inflation to cover the public so that the cost balances out. But this is often not the case.
How can inflation hurts your money?
When changes in inflation are predicted and taken into account by banks and businesses in good time, then it isn’t likely to affect consumers on an individual level.
Often though, this is not the case and inflation will end up snatching money out of your wallet.
- If inflation is high, then the cost of making products rises. This means domestic products maybe more expensive than foreign ones, and may also affect exports. On the other hand, this may positively influences importing businesses.
- The economy has to compensate for the changes in prices, and the repricing process can be expensive and time consuming.
- People on fixed incomes or tight budgets spend less as their money amounts to less spending power.
- Economic uncertainty or instability causes investors, business-owners and consumers to be cautious and less likely to spend money.
- Higher inflation means it is more expensive to acquire a loan (On the up-side, if you already have loan and inflation shoots up and the bank doesn’t accommodate for this by adjusting the interest on loans, you gain, as you will essentially be paying less money on your loan for the current inflation rate).
South Africa’s economy is in a weak position
The country’s economic growth has been stagnating over the last 10 years. This is due to a multitude of issues arising as result of the growing pains of a new nation.
Most recently, discontent and striking in the mineral resources sector, failed service delivery, protests and inefficient job creation strategies have dealt South Africa’s economy a heavy blow.
Not to mention that economies are particularly wobbly in election years.
Along with the stagnating economy, South Africa’s inflation has lately shot up, higher than SARB had predicted. This has caused the markets to caution and stutter, shown for example by decreased exports to Asia (our largest customers).
“A tax dollar paid today is far more expensive than one paid in future dollars. With inflation, money becomes less valuable over time because of the cost of goods increases.”– Coreen T. Sol, Practically Investing: Smart Investment Techniques Your Neighbour Doesn’t Know
South African consumers have responded to all this economic wish-wash by becoming more tight-fisted. The long lag time between economic changes and interest rate adjustments by businesses and corporations has left us in the lurch, paying for it all and unsure how to get out of this mess. If we don’t spend, the economy might stagnate further, if we do spend, the economy might do better, as long as you we don’t get carried away into too much debt.
However, consumer reluctance to spend is a by-product of more profound issues and lack of confidence, relating to South Africa’s unstable business and resources markets, and while significant is not a big a player as those issues.
The moral of this story is to keep your head down and whether the storm by keeping your hard earned money close to your chest, repay existing debt and if you can avoid a loan.