What is inflation and how to fight it

You’ve probably been in a conversation with someone where you reminisced about how a can of Coke or a chocolate used to cost R5. Or your parents told you a story about their first paycheque which was R1 000 for the month. Afterwards, one of two thoughts probably sprang to mind: 1) how rich you would have been at the time given how much money you have today, or 2) you ask why prices keep on increasing. The first one is up to you to fantasise about. The simple answer to the second question is inflation. It is one of those things that you cannot escape, like death or taxes.

What is inflation?

Money is a good that is dictated by supply and demand like most goods. So, when the government prints more money, there is more money readily available, so demand for it decreases. Shops and companies then have to raise the prices of the goods they are selling to ensure they are still getting the same value for their business. If businesses have no price hikes, they will become poorer over time and will have to close their doors. Another way to describe this is when there is money in circulation but the economic activity remains the same, there is more money to pay for the same things. Therefore, prices have to increase for the value to remain the same now that there is more money to go around. People can also pay higher prices because there is more money.

However, most governments print money relatively in proportion to the economic growth of the country. Printing money can help grow the economy, but only to a certain point. Sometimes governments print too much money for their expenses or growth and it has hyperinflation. This is what is happening in Venezuela, what has happened in Zimbabwe over the past few decades and Germany after the First World War. Money was losing its value so quickly, no one could keep up.

How does this play out in your daily life?

Let’s take a salary increase for example. If the country’s inflation rises by 10 per cent, but your annual increase was five per cent, then the numerical value of what you are earning is more, but you are effectively five per cent poorer. What you are now able to buy, also called purchasing power, with your salary is now less.

How can you fight inflation?

• Keep your money in a bank account: Having a nice wad of cash in your wallet might feel nice, but if you keep it in there for too long, what you can buy with it becomes less. When you put your money in a bank account, you are earning interest on the cash which would have been losing value in your wallet. However, and this is a big but, the savings rates of bank accounts are not all above the country’s inflation rate. So, if you put the money in the bank and its savings rate is lower than annual inflation, your money is still losing value over time, just at a slower rate than in your wallet. Do your homework and find a bank account that offers higher than inflation savings rates;
• Budget: There are evergreen costs that we pay for every month, such as food, fuel, public transport and housing, and annual expenses, such as buying clothes and getting your car serviced, that are always increasing. If you stick to money you allocated to every expense every month and year, it softens the blow of these and unexpected costs;
• Find cheaper alternatives and look for specials: Ask yourself if you really need to buy the branded bread and milk when there are generic shop versions available. These are often cheaper and can save you money in the long run. Buying specials can also help. Before you buy anything, ask yourself if you really need it. Track your spending habits and you might see that you are spending money on unnecessary things. These smaller mundane amounts add up and can help you ward off the inevitable increases caused by inflation; and
• Look for investment opportunities: Inflation might seem terrible on the surface because it is continually chipping away at the value of what you own. But that is not the case with all investments. Where the value of your car might be dropping daily, the value of other investments often increases over time. These include property, stocks and commodities. Do your homework and find a broker or financial adviser who can help you make wise investments that will grow in the long run.