What is inflation and how does it affect me?
Inflation is the annual increase in the cost of goods and services. Inflation has a big impact on our daily lives and how much your hard-earned money is worth, so it's handy to know how it all works.
Inflation refers to the sustained increase in the price of goods and services. When inflation goes up, the value of your money goes down. This means that you can buy less for R1 today than you could yesterday.
Inflation might seem complicated, but its principles are simple. Read on for a breakdown of inflation and how it can affect you.
What causes inflation?
There are three generally accepted theories on the causes of inflation:
1. Cost push
When a company's production costs go up, they need to increase prices to keep up their profits. Increased costs might include things like fuel, raw materials or salaries.
2. Supply and demand
If the demand for a product grows faster than a company is able to supply the product, prices increase. If there is an oversupply of a product, but a low demand for it, prices decrease.
3. Fiscal policy
The word 'fiscal' means relating to government revenue, especially taxes, and fiscal policies can impact inflation. For example, an interest rate hike happens when the South African Reserve Bank (SARB) increases the cost of borrowing money. This discourages spending, which can lower inflation. Alternatively, an interest rate cut means that you will pay a lower interest rate on money you owe the bank. This encourages spending, which can increase inflation.
How is inflation measured?
Two main price indices are used to measure inflation. The first is the Consumer Price Index (CPI), which measures changes in price over time from a consumer's perspective.
This measurement is calculated by putting together a 'market basket', which is made up of basic goods and expenses, such as bread, milk, electricity and medical aid. The basket aims to represent the common spending basket of an average consumer in the economy. Statisticians then compare the cost of the basket over time to see how it has changed.
Second is the Producer Price Index (PPI), which measures changes in price from a producer's perspective. It measures the differences in prices that producers charge for their goods and services over time.
How can inflation affect me?
Inflation can impact your life in very direct ways. So it's important to understand how it works, and invest in a way that ensures you can beat it. Learn more about how inflation can affect your investments here.
This document is meant only as information and should not be taken as financial advice. For tailored financial advice, please contact your financial adviser. Discovery Life Investment Services Pty (Ltd): Registration number 2007/005969/07, branded as Discovery Invest, is an authorised financial services provider. All life assurance products are underwritten by Discovery Life Ltd. Registration number: 1966/003901/06, a licensed life Insurer, an authorised financial service provider and registered credit provider, NCR Reg No. NCRCP3555. Product rules, terms and conditions apply. Discovery Life International, the Guernsey branch of Discovery Life Limited (South Africa),is licensed by the Guernsey Financial Services Commission under the Insurance Business (Bailiwick of Guernsey) Law 2002, to carry on life insurance business.
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