‘Inflation’ – it's a word that’s often heard but seldom understood. Most of us know the basics; we understand that inflation affects the price of food, goods and services in a country. But few of us really know what inflation is, what causes it and how we can prepare for the effects of it. And that’s why we have this article: to give you a better understanding of inflation and what you can do to minimise its impact on your life.
In a nutshell, inflation refers to the general increase in the price of services and goods in a country. This doesn’t necessarily mean that the price of everything increases - for example, the price of electronics could stay the same - but it does indicate the annual overall percentage increase in prices. Of course, as the cost of things go up, the rand devalues and your money doesn’t stretch as far as it did before.
Inflation in South Africa is measured using the Consumer Price Index or CPI, which is the average spending or living costs of a person. The CPI is calculated by totalling the costs of a predetermined ‘basket of goods’ and services as used by an average South African. And inflation is calculated by then measuring the rise in the price of this ‘basket’ over 12 months. This is always expressed as a percentage.
A number of different factors cause inflation in South Africa. The first is demand. If the demand for a certain product or service increases due to limited availability, the price for the said product or service will rise. This type of inflation is known as ‘demand inflation’.
Another type of inflation is called ‘push inflation’. Push inflation occurs when the prices of goods rise because of a cost increase somewhere in the production line, such as the labour or the overall cost of production itself. Naturally, when the cost of production increases, the price of that product increases with it to ensure producers can still make a profit on their goods. The main factors that tend to influence the cost of production include the price of oil, the rate of exchange and salaries.
Other reasons for inflation are the price of imported goods and the price of petrol. If the price of petrol goes up, it not only affects you directly with the price of the petrol you put into your car, it also affects you indirectly. An increase in petrol leads to an increase in transport costs, which will impact the cost of all goods and services that rely on transport (almost everything).
There’s nothing we can do to stop inflation. You can, however, learn to manage your finances better so that you are always in a position to handle inflation. The first thing to do is ensure that you save properly and set aside a little nest egg that you can make use of when prices increase. Having an emergency fund [link to blog 205 - how to create an emergency fund] will help ensure that you aren’t completely stretched when the costs of living rise.
The next thing you need to do is tackle your debt. Make sure that you have paid off any outstanding debts if possible (or are at least always making your payments) and that you are constantly looking to improve your credit score [link to blog 015]. A good credit score means that you will be able to apply for credit (such as an emergency loan) if need be. Keep in mind an emergency loan won’t be necessary if you have saved a substantial amount in your emergency fund.
The last thing to consider is your budget. Firstly, do you have one? If not, you need to set one up from today. If you’ve already set up your budget, you need to have another look at it. Where can you cut your spending each month and save a little extra? Ensure that you spend only what you need to and that you exercise the discipline to stick to your budget. That way, you can put any leftover money straight into your savings (your emergency fund, for example), where it can sit until you really need it.
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