Reasons to be happy about inflation in SA

People are often quick to comment on doom and gloom posts and add their voice, and with the current subdued economic outlook, there seems to be plenty to be grim about. But what if we looked at something, like inflation, and highlight a positive South African success story?

“… Inflation??” you cry.

Hear this out.

When people speak of inflation, it’s often the villain of the financial story. It’s blamed every time we swipe our cards to pay for goods and services, or look into our bank accounts when times are tight.
And why not? After all, the very concept of inflation is that our money is now worth a little less than it was before.

But, inflation is not that bad guy it’s made out to be. In fact, the lack of inflation can be far worse.

When inflation is bad

Most people confuse inflation with hyperinflation – an excessive amount of inflation in a short space of time. A classic example of hyperinflation is what happened to the Zimbabwean dollar. In first world countries, hyperinflation usually only happens in very dire circumstances (the German Deutschmark after WW1 comes to mind).

Inflation, on the other hand, is when the prices of things in a country go up moderately, usually three percent or less in one year. Just under two percent is considered typical.

When inflation is good

Inflation can be good for three kinds of people: savers, earners and investors. If you are simply spending all your money, inflation is undoubtedly negative in the short term. You can now afford less things than you could before. Inflation also does – in most cases – tend to trickle down to salaries as many employers aim to increase salaries on a regular or annual basis in order to compensate for inflation.

But if whatever you have isn’t likely to be spent any time soon, inflation can be a very good thing. To put it very simply, inflation is measured by economists as how much money is exchanged for goods or services in a country. This means that the money part of the equation increases in value.

If you have used that money to buy, for example, a house, then that house is now worth more than it was. Someone else wanting to buy it from you after an inflation hike would have to pay you more than you paid at first. This means that, for investors, inflation is great.

The world’s ongoing inflation woes

Global markets, particularly the US, haven’t had material inflation in quite a while. Risk of deflation has been talked about – more than a decade, in fact – and that is indeed very bad.

Deflation is what economists call ‘demand-pull inflation’ – when you have too much supply and not enough demand on goods. This happened to the property market in America in 2013 and, to a lesser extent, has just happened a couple of years ago in South Africa. House prices plummeted by as much as 30%, meaning that no one was buying. Why buy now, when you can wait a month and get an even better deal then? People couldn’t sell their houses without losing a lot of money.

South Africa and inflation

In contrast to elsewhere, South Africa has been relatively protected from inflation issues. We mostly hover around the four percent mark, with increases of less than two percent a year.

According to Investec: “during the past two decades, the significant swings in South Africa’s inflation rate have been driven to a large extent by exogenous shocks, mainly energy prices (international oil prices and domestic electricity tariffs), food prices and the exchange rate. More recently, inflation appears to be firmly under control… headline inflation has been within the target range of 3-6% since April 2017.”

Investec goes on to say that their “current forecast is for headline inflation to average 4.2% in 2019 and 4.6% in 2020, compared with the SARB’s forecasts of 4.2% and 5.1%. We expect core inflation to average 4.2% in 2019 and 4.4% in 2020. By historical standards, inflation is subdued, but not dead, and not without risks. We assess these risks, however, to be fairly balanced.”

This is quite different from other countries, whose inflation rates are well below that are starting to be a real concern.

(Source: Statistics South Africa and Investec Asset Management, as at 30.09.19. Investec Asset Management forecasts are from 01.09.19 onwards.)

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