Inflation pointing in the right direction….

Mar 27, 2018

The consumer price index in South Africa increased 4 percent year-on-year in February of 2018, easing from a 4.4 percent rise in January and below market expectations of a 4.2 percent gain. It was the lowest inflation rate since March of 2015.

So what is inflation all about?

Economies depend on the value of their currencies to improve the standard of living of their populations. The cost of living is carefully measured by monitoring the prices in a basket of goods. These prices are factored into an overall percentage which is know as the consumer price index or CPI.

The rate, theoretically, represents the purchasing power of a countries’ currency year on year. It stands to reason that the higher this rate climbs the less the purchasing power will be in the future.

Your investments should grow above CPI

If you want your improve your financial well being your wealth needs to beat inflation. R100 a year ago will have a current purchasing power of R96 at the current CPI of 4%. So the R100 will need at least a 4% return to keep the value over a year and to improve its value and return should be above this rate (known as the real rate).

We have differing inflation rates

The CPI is an index of 400 items. It can be argued that we all have our own inflation rates depending on the items we actually purchase in the basket. White goods such as televisions and fridges tend to become cheaper over time and these bigger ticket items bring the average down. We don’t buy these items as frequently as food and petrol. So many South Africans may well experience a much lesser value of their rand than the quoted 4%.

Keep a close eye on inflation

When you negotiate your next increase (if you are lucky to get one) be aware of the prevailing rate of inflation. Companies manage their businesses around the rate to ensure that their valuations are real. Your personal wealth needs to do the same. If you are improving above inflation you are growing and if you are falling behind.