Investing – How to beat inflation
In the old days, if you shopped around, you could get a 5-litre tub of yogurt for R25, but these days it’s never the case. And every time you go to the shop two litres of milk cost a bit more. That feeling that everything is getting more and more expensive … that’s inflation.
In short, inflation refers to the general increase in the prices of goods and services in the economy.
Inflation in South Africa is measured by the Consumer Price Index. The Index shows how the prices of a basket of goods and services change over a year.
If the inflation rate is 7% for the year, it means your money’s ability to buy goods and services has decreased. If for R100 you could buy bread, milk and eggs in the past, you would now need R107 to buy the same items. If your income does not increase by at least that rate for the year, your ability to buy what you need and want will decline, in other words your buying power will be less.
Ata wants to know…
What causes inflation?
Many things. Firstly, prices across the economy can be pushed up. An increase in fuel prices is a common example, as it leads to most businesses having to increase their prices. Having to buy at higher prices leads workers to require higher salaries and wages.
Secondly, inflation can occur when things are going well, salaries and wages rise, and people have more money to spend. If everyone in the economy spends more money, the additional demand for goods and services often results in prices increasing.
A third cause is where people and governments expect prices to go up. For example, if a war is expected, businesses would increase the prices of their goods in anticipation.
At the extreme end, governments might print more money than they should, making your money less valuable, resulting in hyperinflation, as seen in Zimbabwe.
Alfred was lucky enough to keep his job during the pandemic. Once life returned to normal, he decides to do some renovations to his house. He appoints Nigel the builder. Nigel is receiving numerous requests for renovation projects. However, he is struggling to get the necessary imported Italian taps and steel from India because there is a shipping backlog. The war in Ukraine has caused the oil price to rise, which means fuel is more expensive. Nigel has to charge more for his services and soon Alfred’s renovations cost much more than they would’ve before the pandemic. Alfred now needs to ask for a salary increase. If these price increases for various goods and services happen to many Alfreds and Nigels across the country at the same time, it leads to inflation.
How can I beat inflation?
1. The right place. Don’t save your money under your bed as it will lose value over time. Invest your money in a place where it grows at a rate that not only keeps up with inflation but beats it – this is called a real return.
Ata saves R500 a month in a savings account with a fixed interest rate of 5%. If the inflation rate is 4%, his real return is only 1%. Bear in mind, the inflation rate fluctuates yearly, so his real return will vary over time.
2. Take your time. To earn higher above-inflation rates, you need to think long-term. There are years when the shares on the stock market have not only failed to beat inflation but also shown losses. However, over time your chances of making a loss become less and less.
3. Manage risk. The rule of thumb for protecting your money in an inflationary environment is investing in asset classes that have historically been shown to beat inflation. These include property, commodities, debt and equity (shares in companies). To better your chances of beating inflation, invest in a range of assets – this is called diversifying your portfolio.
4. Knowledge is power. Always try to negotiate a salary increase that at least correlates with the inflation rate.
Ata wants to know…
Where can I find out what the inflation rate is?
The inflation rate varies year on year – it’s been as low as 2,06% (2005) to as high as 18% (1986)! Visit Worlddata to see the current inflation rate.
This article was funded by Fairtree Asset Management.