By Sydney Sekese, CFP® professional and FPI 2016 Media Award Winner

Given a chance to consume an elephant, how would you go about doing this? One bite at a time. We all know the saying, but we often fail to apply this lesson in our lives. If you view the elephant as one giant goal that your whole life depends on, you’re setting yourself up for disappointment. Inflation is that elephant which affects most areas of our life.

Consumer prices in South Africa rose 3.8 percent year-on-year in March of 2018, slowing from a 4.0 % gain in the previous month and below market consensus of a 4.1% increase. It was the lowest inflation rate since February of 2011. The slowdown in inflation appears to be comforting news. But what is this elephant, inflation?

Inflation is defined as a sustained increase in the general level of prices for goods and services in a county, and is measured as an annual percentage change. Under conditions of inflation, the prices of things rise over time.  For example, if we say inflation rate is 2%, it means a pack of “chappies bubble gum” costing R1 this year, will cost R1.02 next year.

This leads me to the next question: How can one better budget their grocery buys with this increase? Herewith some simple tips:

  • Lessen the need to buy on impulse. Interrogate your trip to the grocery shop and ask whether a particular purchase is on some needs or want basis.
  • Leave within your means and try not to impress the next individual.
  • The old-school grocery list is very useful, attempt to stick to it at each trip to the grocery shop. For the tech savvy individuals, they may also download an app to make the journey exciting.

Our individual experience of the cost of living is usually not aligned to the released inflation rate as announced by Stats SA. To measure inflation, one needs some yardstick of the general level of prices in the economy. The most popular yardstick is the Consumer Price Index (CPI), which is an index of the prices of a representative “basket” of consumer goods and services. The CPI therefore represents the cost of the “shopping basket” of goods and services of a typical or average South African household.

The total South African CPI basket consists of about 1500 different consumer goods and services which are classified into more than 40 groups and subgroups for which separate indices are constructed. Some of the high-level classification of individual consumptions include: Food and non-alcoholic beverages, clothing and footwear, housing, water, electricity, health, transport, education, restaurants and hotels and many more.

A colleague was giving a lecture on inflation and someone asked her what she thought of core inflation versus headline inflation. Core inflation ignores food and energy whereas headline inflation includes everything (including food and energy). So my colleague responded to the audience that they would be fine if they don’t drive, don’t eat and most importantly if they don’t drive to eat. Confusing, but helpful to curb the debilitating effect of inflation.

If one thinks of the household budget as fixed, then a change in relative price will lead to a change in consumption of that product. If people spend more on energy/petrol, they will spend less on other items and therefore putting downward pressure on those items. By ignoring food and energy (when it rises), we understate the true inflation rate.

Inflation is also public enemy number one when it comes to investing. The goal of all investors is to beat inflation and grow capital in real terms. Sadly, inflation is here to stay and the buying power of your money would halve every ten years at an inflation rate of only 7%. Luckily South Africa has adopted inflation targeting to keep a steady long term rate of inflation and to maintain price stability.

 

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