When inflation occurs, the purchasing power of money decreases, meaning that you need more money to buy the same amount of goods as before. Picture: Freepik
Many South Africans consumers are concerned about the ever-increasing inflation rate.
Inflation is pushing up the cost of food, fuel, and living expenses, as well as cutting into your buying power while your salary is not increasing.
Here is a closer at what inflation and deflation is and the impact is can have on your pocket.
What is inflation?
Inflation is the general increase in the prices of goods and services over time. When inflation occurs, the purchasing power of money decreases, meaning that you need more money to buy the same amount of goods as before.
According to Jaco Prinsloo, certified financial planner at Alexforbes, there are two types of inflation:
– Demand-pull is the increase in the general price level of goods and services resulting from consumers spending more (demanding more).
– Cost-push is the increase in the price level of goods and services resulting from production inputs that have become more expensive (products costing more to produce).
What is deflation and why is it bad?
Deflation, which is a general decrease in the prices of goods and services in an economy, is a sign of a weakening economy (weak demand). Businesses respond to falling prices by slowing down their production, which leads to job lay-offs and salary cuts.
Pros and cons of high inflation
According to Prinsloo, the benefit of inflation is not necessarily because of inflation itself, but from economic growth and employment associated with it.
This highlights the important balancing act of monetary policymakers, which is to balance their objective of higher employment and a stable economy with price stability and managing inflation, without going into a deflation situation.
What can you to do mitigate inflation?
As prices continue to increase due to economic factors, there is not much that you can do against inflation other than changing your behaviour as a consumer.
Try to lower your monthly expenses – see if you can renegotiate your insurance or cancel unused contracts. Increase your income by finding an extra income stream like a side hustle.
Speak to a certified financial planner to make sure your investments are diversified and in line with your income, expenses, investment time horizon and risk appetite.
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