People often talk about inflation and inflation rates, but what impact does it have on your life, both day-to-day and in the long term? What is inflation actually and how is it measured?
Simply put, inflation is the increase in the cost of goods and services over time. It means that an item that costs R20 in 2020 may cost more in 2021, and you’ll get less for R100 next year than you could this year.
How inflation is measured
The Consumer Price Index measures the changing cost of a fixed ‘basket’ of goods and services that have been chosen to be representative of South African households’ expenses. This comparison in the price over time is an indicator of inflation.
Causes of inflation
Inflation is related to supply and demand – goods and services are produced (supply) in order to meet a demand for them, and the amount of demand can determine the price charged.
There are two basic types of inflation:
Demand-pull inflation – the total demand for goods and services goes up faster than the ability to produce those goods and services, meaning that suppliers can now increase their prices as demand is high.
Cost-push inflation – the cost of producing goods and services increases, meaning that suppliers need to charge more in order to make a profit. For example, when the fuel price goes up, so does the cost of transporting goods, resulting in consumers needing to pay more for the goods to cover that increased transportation cost.
Of course, price changes are very complicated, and it can sometimes be difficult to pinpoint the exact cause for inflation.
Impact of inflation
Inflation affects not only your everyday life but also long-term savings such as retirement funds. The amount you’re saving now won’t go as far in the future when you need to use it. So, it’s vital that your retirement planning takes this into account – it’s wise to talk to a financial advisor about what types of investments are more likely to be able to beat inflation.
Find out how inflation affects buying a car.
Learn more about saving for retirement.
Your car’s value goes down over time.