With inflation, running at these stressful levels, and not seeming to come back soon we need to be very aware of how this impacts on our financial future.
Quite simply, the higher the inflation rate, the less the value of your money in the future.
Thankfully, the governor of our Reserve Bank has assured us that he is determined to target inflation between 6 and 3% with the ideal being 4.5%. In order to do this, he will continue to raise interest rates until the current inflation rate at 7.5% pulls back into the range.
To help us understand the impact of high inflation on our money into the future, let’s use the magical rule of 72.
If we divide the current inflation rate of 7.5 into 72 the Rand will halve in value 9,6 years.
Should we divide the Reserve Bank target rate of 4.5 into 72, the Rand will halve in value in 16 years, which is a far better outcome.
So there’s a trade-off between taking the pain now with rising interest rates versus dealing with diminishing value of our money in the long term.
Spare a thought for the first world countries Europe’s double digit inflation rate is the highest in history. America is battling to pull back on 10%. South Africans have dealt with high inflation in the past so its not new to us. Double digit inflation in the first world countries is certainly unfathomable!
So we need to brace ourselves for the foreseeable future tolerating the high interest levels until we tame inflation.
South Africans need to target debt as an obvious rising cost in the household budget whilst we face of rising interest rate cycle.
Added to our woes is load-shedding and a water crisis which certainly won’t make things easier. South Africans are notoriously resilient. We will need to stretch this side of us a while to get out of this storm.