The Wealth Room

Effects of Inflation

Today we will move onto the effects of inflation. In my opinion this is once again another important aspect that one needs to be aware of and pay a huge amount of attention to. I like to call inflation the cancer of economics, as it is continually eating away at the value of our daily expenses and making things way more expensive for us. The main reason for all of my articles is not to scare you or paint a negative picture for you, but rather to educate you so that you are not one of the 71% of South Africans that can’t retire well! (I have linked this to the website of a really good interview if you would like to watch it).

 Ronald Regan (former US President) once said:

“Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man”.

Milton Friedman (American economist, statistician, and writer) also said that “Inflation is taxation without legislation”.

So what is inflation?

In layman’s terms, inflation is the rate that the general level of prices for goods/things  and services are growing annually, and the purchasing/buying power is dropping.

What has inflation or CPI (consumer price index) in South Africa looked like since 1968?  Inflation rate / CPI in South Africa was recorded at 6.60% in June of 2014. Inflation Rate in South Africa averaged 9.44% from 1968 until 2014, reaching an all-time high of 20.90% in January of 1986 and a record low of 0.20% in January of 2004.

In South Africa, the basket of goods that they use to determine what  inflation / CPI looks like is as follows:

Housing and Utilities 24.5%, Transport 16.4% and Food and Non-Alcoholic Beverages 15.4%.

Miscellaneous Goods and Services such as personal care, insurance and finance 14.7%; Alcoholic Beverages and Tobacco 5.4%; Household Contents, Equipment and Maintenance 4.8%; Recreation and culture 4.1%; Clothing and Footwear 4.1%.

The smallest components are Restaurants and Hotels 3.5%; Education 3%; Communication 2.6%; and Health at 1.5%.

The irony is that the things that they determine as small costs, such as Education and Health Insurance are actually the costs that are increasing at a higher rate than inflation.

What does this all mean???

 Well lets paint a simple picture to tie everything together.

Let’s assume that you want to retire in 30 years time at the age of 65, you are currently 30 years old (keep in mind that with medicine getting better and better we are living longer so we need to work longer or plan our retirement funds to last longer). You believe that based on your monthly budget you could easily retire on R 10 000 pm should you be 65 today. So let’s see what the buying power of  R10 000 pm in 30 years time will be worth if we have an average inflation rate of 9.5% as per the stats that Stats SA has given us above.

The R10 000 in 30 years time will have a buying power of  what R657  buys you in today’s terms. In order to have the same value as R10 000 today in 30 years time, you would have to have a whopping  R152 203. As you can see these figures are on the two opposite sides of the spectrum.

So do I have your attention now? This is the power of inflation and how it erodes our buying power on a yearly or monthly basis… and it’s not something that you can ignore!

 One thing that I have come across many times in my last 12 years in the financial industry is people investing their funds into a money market account at a return of 4-6% (Money Markets investments do have their place, but I will touch on that another time). If we look at the average inflation rate above, basically your money is not gaining 4-6% but losing over 3%, as it is not keeping up with inflation. So you are actually losing money and not gaining money. Can you see now how inflation plays such a huge role in or lives… but it doesn’t have to if you are aware of it and make sure you factor it in when you manage your hard earned income.

Below is a chart of what R10 000 will be worth in 10, 20, 30, 40 years time.

It is for you to see how serious the impact of inflation really is. Let’s assume that inflation is 7% for this example, as that is what it is running at in South Africa currently.

Hopefully inflation is starting to come to life for you and is starting to make sense?!

Therefore, I encourage you to start immediately and prepare for YOUR future, make it your priority to “Retire Right”, it must be something that you take seriously as it is not going to happen own its own. Make sure that your investments and income are beating or at the minimum keeping up with inflation.

If you enjoyed this article you would most probably enjoy the articles on

Compound Interest

Time value and Investing

Best Unit Trust for you

All Video Clips supplied by Allan Gray