Why does nobody believe the published inflation rate?
I will attempt to answer this question by explaining how inflation is calculated.
The inflation rate refers to the annual average rate of increase in prices represented by a basket of goods. The clue to answering the above question is identified in this simple definition. The annual price increase is specifically related to the goods contained in the basket. In other words the rate of inflation depends on which goods are included in the basket used to calculate the inflation rate. This is why the public has difficulty believing the published rates.
Each and every person has his or her own personal inflation rate. This is because every person’s basket of goods differs. To illustrate; a family with small children will have an increased weighting of medical expenses in their basket, higher levels of clothing, nappy’s, school expenses versus a married couple without kids who spend their money on cars, restaurants, entertainment and overseas holidays.
The Reserve Bank targets an inflation rate (CPI) of between 3 and 6 %. The current rate of inflation is 3.8% as at March 2018, which is well within the target bands.
The concern for most people relates to the link between inflation and interest rates. The Reserve Bank uses interest rates via its monetary policy to manipulate the economy. During times of recession or down turns in the business cycle interest rates are lowered to provide a stimulatory effect. During boom times or up turns in the business cycle interest rates are raised to slow the economy down and thus prevent boom and bust cycle in favour of price stability.
Frustration arises when food prices rocket by 15% while annual salary & pension increases are based on the official CPI rate. Unfortunately, there is no answer for this, other than calculating your personal rate of inflation and planning for this gap by saving where you can. Unless ofcourse you are prepared to adjust your lifestyle by removing some goods from your basket and leaving them at the till (heaven forbid)!
Over the last few years South Africans have benefited from structurally lower inflation and thus lower interest rates with the Reserve recently have cut interest rates further by 0.25%. However, with global inflation and interest rates on the up, don’t be complacent that rates will remain low forever. Plan accordingly by reducing debt and most importantly living within your means.
Mcomm, CFP®, HdipTax
T. 021-851 3746