By Sydney Sekese, CFP® professional and member of the Financial Planning Institute

The local and global economies reacted swiftly when the pandemic hit the respective shores in 2020. The synchronised medicine (easy policies) that was applied resulted in sufficient liquidity. This stabilised the respective economies and the world did not collapse.  The medicine appears to have worked well until supply chains disruptions, high energy prices (among others) resulted in inflationary pressures all over the world. Inflation is now the elephant in the room. It is better to address it by going back to basics.

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 5%, it means a pack of “chappies bubble gum” costing R1 this year, will cost R1.05 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 412 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. Stats SA updates the basket of goods and services every four years. Part of the exercise involves removing products from the basket, while others are added.

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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Final Thoughts

Practicing self-control and discipline in your wealth and finances will go a long way to manage your individual inflation experience. If not addressed, this invisible inflation is quietly eating away your finances. You don’t see it, but lifestyle inflation is a common disease. As incomes go up, the standard of living of a person also rises. Wants turn into needs, and items that used to be luxuries gradually morph into necessities.

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