"Inflation": We all know the word, and we're all familiar with the general anxiety that comes with it. We learnt how to calculate interest and inflation rates in high school. But what does it actually mean? And how does it impact investors and the market?
The "What" and the "Why"
Most of us know the basics - inflation is the general increase in prices of goods over a certain period of time. The rate of inflation tells us how much more we are paying for certain goods and services, or by how much the price of living in general has increased or decreased. The general cost of living is indicated by the Consumer Price Index (CPI), which consists of the average shopping basket of people within a country. The percentage in change of the CPI cost over time will therefore indicate consumer price inflation for that period.
Although different commodities change prices at different rates and on different occasions (some adjusting daily, as we see in places like our grocery and clothing stores), the salaries of consumers are obviously not adjusted for such minor increases - employers would be drawing up new contracts every week if this was the case!
So, managing the same income, consumers are forced to focus on what they can afford and often have to cut down on the luxuries or non-essentials when prices are on the rise.
This works out to be most detrimental for those who can barely afford the month-to-month without extra niceties.
In a different type of economy, deflation can occur, which is a consistent decrease in prices and the opposite of inflation. Although this may seem like a dream come true for consumers, it can actually severely affect the economic growth of a country. Have you ever held off on buying something because you were sure a new and better deal for that product would be available soon?
Now imagine everyone felt that way every time they went shopping for basic goods -
you as the buyer may end up with the better deal, but there is still a producer who has
lost out on income. On top of this, there will generally be less economic activity
all-round when consumers feel they can delay their purchases.
In this sense, most financial professionals agree that moderate and predictable inflation is indeed a good thing for economies . This is why most national banks hold 'inflation targeting' as their main policy - aiming to control inflation by keeping it at a low and stable rate.
The South African Situation
The annual inflation rate is at an all-time high globally, with a record high in South Africa since 2009 of 7.4% in June 2022 (a whole 0.9% higher than the already soaring 6.5% in May just a month earlier). This rate is above what the markets predicted by 0.2%, and substantially exceeds the South African Reserve Bank's target inflation range of 3-6%. Average inflation expectations by experts have subsequently increased, with a prediction of an average of 6% in 2022, likely progressively decreasing in following years.
Commodity-Led Development
South Africa's economy has largely been commodity-driven, and so we should be taking advantage of the commodity-boom (an increase in prices of raw products, which subsequently impact the prices of other consumer goods) following the Covid-19 pandemic. However, with our general absence of service delivery country-wide, it is almost impossible to do so. The failures of our system have become our biggest hindrance with regards to economic growth.
Take, for example, our ports: Local exports of commodities have been continually stunted due to the lack of service delivery from, and failures of Transnet.
Then, let's look at our energy supply:
Our mining industry is by far the largest asset to our economy, producing the largest supply of platinum, gold and chromium in the world.
How should we expect to continue running a primarily mining-based economy without electricity supplies due to load-shedding and short fallings of energy suppliers? Here we have another example of how poor service delivery, due to mismanagement within Eskom, has led to poor economic development.
However, relying on these commodity-booms is not a safe way to run an economy either, as these are, as a rule, abruptly followed by a bust - a sudden period of economic decline. Under this 'Boom & Bust' pattern, we see South Africa's economy performing well (or better than usual) when other countries are in economic strain, and poorly when other countries are performing efficiently.
The Global Situation
War has always been a source of economic decline, and the Russia-Ukraine situation is no different. In fact, this war has affected the world most drastically already. Most countries depend on the maize, wheat and sunflower harvests produced and exported by the Ukraine, which has heavily impacted food supply world-wide.
Russia, on the other hand, is the main supplier of fossil fuels, oils and natural gas to other European countries. This has been detrimental to European (and subsequently, worldwide) energy supply. A lower supply of energy and food worldwide has obviously impacted the pricing of both of these essentials, and we have seen global inflation regarding these, especially in European countries that significantly rely on energy for heat during freezing winters.
The worldwide inflation of energy and food prices has obviously affected America too, which makes up more than a third of the global economy. If the dollar or energy prices increase, inflation around the world increases, as you have probably noticed over the years - even if you don't understand global exchange.
In essence: The Federal Reserve (Feds) takes to managing consumer expectations by increasing interest rates. This limits consumer spending. The tricky part is raising the rate enough to reduce demand, but not enough to cause a recession (in the best case).
"Inflation is as violent as a mugger"
Although inflation is a controlled and continuous process, it does cause serious damage over time with regards to loss of buying power with money in the bank, compared to funds that are invested and well-managed over time. The graphs above show a perfect example of this - average inflation over time has remained relatively stable between 5-6% per year, however, over 20 years the price of a single household item would have increased by 120%!
A good financial adviser will help you to beat the crook of inflation by structuring your portfolio and investing your money in appropriate areas that will support your money growth to increase faster than inflation.
This is not an easy task, but Finpas has managed client expectations within this area for many years, and we would be honoured to help you catch this bandit, and to apprehend the thief that cheats you of your spending power! Click here to chat to one of our advisers today, or call us on (031)572-3456.
Comments