Understanding inflation

Understanding inflation

Inflation is one of the most familiar terms in economics. Simply defined, inflation measures how much more expensive a set of goods and services has become over a given period. It is a broad measure of the overall increase in the cost of living in a country.

To illustrate, the latest Household Affordability Index, compiled by Pietermaritzburg Economic Justice and Dignity (PMBEJD) indicated that the average cost of the food basket increased by R410.53 (10.2%), from R4,039.56 in March 2021 to R4,450.09 in March 2022. The index tracks food price data from 44 supermarkets and 30 butcheries in Johannesburg, Durban, Cape Town, Pietermaritzburg and Springbok in the Northern Cape.

There are various factors that can drive prices or inflation in an economy including an increase in production costs or an increase in demand for products and services. Inflation is a concern because it makes money saved today less valuable tomorrow. Inflation erodes an individual’s purchasing power and can even interfere with their ability to retire. For example, if an investor earned 5% from investments, but the inflation rate was 3%, the investor only earned 2% in real terms.

The inflation rate in South Africa averaged 8.74% from 1968 until 2022, reaching an all-time high of 20.70% in January 1986 and a record low of 0.20% in January 2004. There are a few metrics that are used to measure the inflation rate. One of the most popular is the Consumer Price Index (CPI), which measures prices for a basket of goods and services in the economy, including food, cars, education, and recreation. In South Africa, the most important categories in the CPI are:

• Housing and Utilities (24.5% of total weight)
• Transport (16.4%)
• 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%)

Restaurants and Hotels, Education, Communication and Health account for the remaining 10.6%. The CPI basket was revised in January 2013 so one wonders how accurate the calculation of the rate may be given that consumer spending might have evolved significantly since then.

The impact of rising costs and inflation has severely constrained the ability of consumers to meet their basic needs over the years and more consumers are resorting to credit to make ends meet.  First National Bank estimates that it takes an average of five days for a middle-income consumer to spend up to 80% of their monthly salary. This suggests that the average middle-income consumer, earning between R180,000 – R500,000 per annum, survives on 20% of their monthly salary for more than 20 days in a month.

Currently, the inflation rate in South Africa is 5.9% and with the rising costs of fuel and food, it is estimated that the rate could rise to over 6% in the short term.

Aneesa Khan

Head: Finance & ICT