People often joke and say they become stronger the older they get, because they can now carry R1 000 worth of groceries on their own. This was not possible when they were younger.
We all know this is due to inflation, which simply means we have a continual and noticeable rise in prices in general. But there are underlying economic principles that can help us understand what can be expected in the near future.
There are numerous factors that cause inflation, but we’ll touch only on a few that are currently prevalent.
The one thing we are all aware of is the rising fuel price triggered by Russia’s invasion of Ukraine. Besides the fact that it will become very expensive to travel, many people will need to consider how much travelling they can still afford, for the rising fuel price also has a consequential effect on the price of all the products we buy.
Included in the price of every product we buy is the cost of transport from the manufacturer or wholesaler to the shop where we can conveniently buy it. Economists have consensus that our food prices do not yet reflect the influence of the increased price of fuel. But with an expected rise of between R2 and R2,50 per litre of fuel in April, a new reality may be on the horizon.
Besides the alarming effect of the fuel price on the inflation rate, there is another factor that is perhaps less obvious to the average consumer, namely the rate at which the country’s money supply is growing.
The biggest growth comes from the amount of credit consumers took up over the last two years. This growth in itself also contributes to a rise in the inflation rate.
When our economy came to an almost complete shutdown due to Covid, the prime interest rate plummeted to as low as 7%. The lower interest rate brought the purchase of houses and luxuries such as motor vehicles within the grasp of more households. We see the extent of this in the figures recently released by banks.
Standard Bank, which holds about one third of all home loans in South Africa, reported it had extended a record value of R80,5 billion worth of home loans during 2021. This is a 43% increase for the year and is 61% higher than in 2019. Also, the percentage increase in motor-vehicle financing and personal loans was in double digits.
One of the tools the South African Reserve Bank (SARB) has at its disposal to curb both the inflation rate and the growth of the country’s money supply, is to increase the interest rate. For people with investments this is good news, but for those who have loans that still need to be repaid, it may become a snare during the rest of 2022.
Bear in mind that the SARB’s target for the growth in the country’s total money supply is preferably as low as 5% per annum. Also their target for inflation is between 3% and 6% per annum.
Currently the inflation rate touches on 6%, with the inflation rate of food prices already beyond the 6% upper margin.
As mentioned, the way to curb this massive growth in credit as well as the rate of inflation, lies in the upward adjustment of interest rates.
In November, January and March we have already had increases in interest rates to a total of 0,75%. Economists predict another four hikes in the interest rate during 2022 to a level of at least 8,75%.
If you were able to stick with me through all this economic jargon, you most probably realised that at present it may be wise to follow a conservative approach as far as taking on extra credit. Yet it might be a good time for extra savings.
Should you be the owner of a business that extends credit to customers, a more conservative approach may also be beneficial because many people will feel the pinch of the current economic turmoil.
. David Malherbe is a career and business consultant and resident of Langebaan. Contact him at davidmalherbe1@gmail.com
