THE PERILS OF INFLATION
Inflation shows no bias, it doesn’t have favourites and inflation certainly doesn’t discriminate. It impacts everyone no matter one’s personal circumstances. As anyone who has recently found themselves in a supermarket paying for their groceries, shopping inflation is really starting to bite. In this month’s Financial View, we assess just how damaging inflation can be.
Inflation is simply defined by the International Monetary Fund as “the rate of increase in prices over a given period of time.” It essentially provides a guide of how much more we pay for the same item from one period to the next. Since the invasion of the Ukraine by Russia in 2022 the world has been battling with inflation as global supply for oil (and thus fuel) and certain food types (grain a prime example) have been impacted. For most countries the rate of increase of inflation has started to come down. There are a few exceptions however, one of whom unfortunately is South Africa. As one would note from our newsletter the last two CPI releases have showed a slight uptick in inflation within South Africa.
In their latest release, indicating that inflation has currently reached 7.1% year-on-year, Stats SA provided some great insight to the current challenges that we, the consumers, face. Food price inflation was at a staggering 14% for the past 12 months, which is the highest food price inflation has been since 2009 (and casting our minds back that was driven off a low base on the back of the 2008 Global Financial Crisis).
In a telling graphic that Stats SA released with their CPI report they demonstrated the largest price increases over the 12 month period to end March 2023 (inflation measurement always lagged by a month due to the need to compile the data) and just for the month of March 2023.
What one can see is that the large price increases over the past year have included staple foods such as maize and vegetables. The 45% increase in the price of onions is quite eye-watering as this is something grown locally in the ground. We don’t import onions as we have large onion growers in the North West province. Similarly looking at the one month the large increase in the price of bananas stands out. We do import some bananas, but the South African climate is also conducive to growing bananas in KwaZulu-Natal & Mpumalanga.
Home cooks across the country have had to change their choice of meals based on these price increases. Food constitutes 15% of the South African basket of goods and thus has a very meaningful impact on our wallets.
The rise in the price of foodstuffs can be attributed to three things. The first is a weak Rand impacts the price of imported goods. Secondly, an increase in input costs can force the producer to increase their selling prices. Lastly, supply & demand can impact selling prices, especially in a country where our weather and water supply can vary from year to year. If there is a very good season, we tend to grow more than enough to meet our needs and thus availability is plentiful. In a poor season supply becomes constrained and prices increase – i.e. the consumer is willing to pay more for what is now a scarce resource.
As someone who spends some of his social time with farmers, I can confirm the massive price pressure the farmers are under and how they are forced to pass on whatever cost increases they can. Labour has been pretty consistent as an input cost in our agricultural industry but costs like diesel for tractors, chemicals for spraying and cost of seed have all increased dramatically as a result of the weak Rand.
So ultimately a lot of the inflationary pressures that we are all experiencing is because of the weak Rand. There are tools available to government that would bolster the value of the Rand but ultimately it requires foreigners to be willing to invest in South Africa. Foreign Investment will increase the demand for Rand and strengthen our currency.
Why inflation is so important
Inflation is decimator of wealth as it reduces the value of money. Consider what you could purchase for R100 a decade ago and consider what R100 gets you these days. Inflation at 7.1% halves the value of money in just 10 years. After two decades it would be worth only a quarter of what it is now as it halves again.
What can one do in the face of inflation
There may be a temptation to spend and spend now before prices rise but that is potentially one of the worst actions. Short term thinking often does not generate the best long term results.
What one needs to focus on is selecting investments that will outperform inflation. All your investments need to have the correct mix of asset classes to outperform inflation, and ideally the ability to outperform very comfortably. Real wealth generation takes a long time, and you are effectively trying to move forward whilst dragging this very heavy weight labelled inflation. Compare your investment strategy to the strong man who is trying to pull a truck / airplane / tractor to prove his strength. It takes all his strength to get the item moving but as the said truck / airplane / tractor starts to move it starts to pick up its own momentum and continues to increase its speed. Your investment eventually gets to the point where it is working for itself, and you just need to make sure that you are applying enough assistance to maintain that forward growth. Just always remember that inflation is acting as a brake on the other side.
Lastly it is worth remembering that this inflation problem is currently a global phenomenon. We are not the only country with rising inflation In the United Kingdom their latest inflation data as released by their Office of National Statistics indicated that their food inflation is at 19.2%. Bloomberg uses the data to create an English Breakfast index. A Full English Breakfast or a “fry up” as they call it in preparation for the King’s coronation can certainly be a very expensive exercise.
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