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Picture: 123RF/DELTAART
Picture: 123RF/DELTAART

Inflation and interest rate increases have been the talk of the town for some time now, but what does this mean for South Africans?

We are just emerging from the depths of a pandemic, where global economic activity came to a near halt, albeit temporarily. During the early days most countries instituted lockdowns of varying degrees and many governments and central banks put stimulus measures in place to try to encourage consumers to do what they do best — consume!

Specifically, in the US there has been some debate on whether the level of stimulus was appropriate, and looking back now at face value it is unsurprising that inflation is increasing aggressively considering the vast amount of money the US Federal Reserve pumped into the hands of US consumers.

That would be a nice, clean-cut explanation, which we could all likely accept. Unfortunately, as is usually the case with economics, it is not that simple. Supply chain snarl-ups have also had a role to play. Granted, these are also linked to the pandemic, but they have not done anything to help matters.

In ultra-simple terms, demand for goods and services now exceeds supply, leading to increasing price levels. As you can imagine, problems in supply chains that lead to lengthy delays in goods being delivered to the ultimate customer worsen this supply-demand imbalance.

But wait, there’s more. On top of all that we have a war in Ukraine (commonly referred to as the “breadbasket” of Europe), which has historically produced vast quantities of grain that many countries depend on heavily. On the other side of the coin is Russia, which is now a heavily sanctioned nation that previously supplied a large amount of oil, fuels and other energy exports to Europe and the rest of the world.

This leads to further upward pressure on food and oil prices as there is in effect less of these essential resources to go around, which also stokes the flames of inflation.

The next question naturally becomes: what are we doing about it? The main way governments and central banks attempt to combat inflation is by affecting the supply-demand equation, and the most powerful tool they have in this regard is setting interest rates.

Increasing interest rates generally makes money less freely available in the economy as it is now more expensive to borrow funds and pay back interest to the lender. This eventually decreases demand as consumers and businesses alike adopt a defensive financial stance, cut spending and are less eager to incur debt. This generally leads to a reduction in demand, which has the effect of slowing inflation as supply and demand become more balanced.

However, central banks walk a fine line when increasing interest rates — do it too slowly and inflation remains out of control, do it too fast and they risk tipping the economy into recession. As you can imagine, if interest rates rise too far and too fast, demand drops and overall economic growth turns negative.

Now that we’ve covered some of the background, what does this mean for consumers? For starters you can expect your general living expenses to increase, everything from fuel for your vehicle to the groceries you buy are likely to become more expensive. Some goods may increase in price more than others as inflation affects different goods to different degrees.

Recall that government recently reduced the levies on fuel to try to offset some of the fuel price increases arising from oil becoming more expensive. However, this cannot be a permanent solution as government requires these levies to fund part of its budget and other expenditures. Therefore, when this levy exemption expires at the end of May we are all in for a seismic increase in the cost of fuel.

Next on the list: paying interest on any debt you may have is likely to cost you more each month. This will depend on the specific structure of the debt, but in general terms any debt that is subject to an interest rate that is not completely fixed will mean your interest costs are likely to increase.

You would hope that your salary/wages would increase in line with inflation, but this is rarely the case when inflation is running at high levels. In fact, if wages across the board increased rapidly to counter the general inflation in the prices of goods it could lead to a dangerous economic scenario.

Broadly speaking, increased wages lead to higher costs for companies, which will often lead to them setting higher prices for their goods and it is not hard to see how things can get out of control quickly if this destructive cycle continues, which is why it is commonly referred to as a wage-price spiral.

What should you do? The first step is to review your finances and get a reasonable idea of what your expenses could look like. From there you could cut down on the unnecessary expenses you can temporarily live without, and from there if you need to cut expenses further some difficult choices may need to be made to ensure you’re still able to afford the important stuff (such as bond payments).

The rise in inflation and interest rates will affect everyone differently and each consumer will need to take the necessary measures to ensure they can get through what is probably going to be a difficult few months, or years for that matter.

The old Chinese proverb applies: “When the wind of change blows, some build walls while others build windmills.”

• Toy is a director and private wealth manager at Legacy Family Wealth.

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