Many South Africans are concerned about the ever-increasing inflation rate. Inflation is driving up the cost of food, fuel, and living expenses and eroding your buying power. Your salary is not stretching as far as it once did due to inflation.
Inflation is a general increase in prices and a decrease in what you can buy for your money. It’s an economic term that means you have to spend more over time to fill your petrol tank, buy a litre of milk or get a haircut.
How does inflation affect interest rates?
There is an inverse relationship between interest rates and inflation. When interest rates are low, inflation generally rises. Therefore, if inflation is rising faster than a central bank prefers, policymakers might try to combat it by increasing interest rates. This shows that rising interest rates are a monetary policy response to rising inflation. If inflation drops below the target rate, policymakers might lower interest rates.
Lenders will also demand higher interest rates as compensation for the decrease in buying power of the money they are paid in the future.
What does high inflation mean to my investment?
When inflation is higher than the returns you get on investments, your money is worth less than before. High inflation reduces the value of your investment because it erodes the buying power of future income.
How do different investment types perform in a high-inflation period?
Fixed, long-term cash flows like government bonds tend to perform poorly when inflation is rising since the buying power of those future cash flows falls over time.
Correspondingly, commodities and adjustable cash flows such as property rental income tend to perform better with rising inflation.
Inflation-indexed bonds are designed to protect investors from inflation (an inflation hedge) and generally do well in a rising inflation environment.
Historically, gold and shares seem to be a good line of defence when inflation is above 6%, while cash and longer-duration bonds generate negative returns.
What is deflation and why is it bad?
Deflation is a general decrease in the prices of goods and services in an economy. This is a sign of a weakening economy (weak demand). Companies respond to falling prices by slowing down their production, which leads to layoffs and salary reductions.
Pros and cons of high inflation
The benefit of inflation is not necessarily because of inflation itself, but from economic growth and employment associated with it.
What can you to do mitigate inflation?
As prices keep on rising due to economic factors, there is little you can do against inflation except changing your behaviour as a consumer.-moneyweb
