We have all heard of inflation, but a lot of us don’t really understand how it works, why it happens and how it affects us. Inflation is the rate of an increase in prices for goods and services in an economy over a set time period. This is a guide on how inflation works and how it affects us as South Africans.
What is inflation
It is the rate at which prices for goods and services increase over a set time period. This is why prices seem to be going up each and every year, the opposite of inflation is known as deflation, when prices go down. It is the reason why a R10 airtime gets you less and less talking time on the phone each year.
At some point a R10 airtime used to give you more than 10 minutes of calling, today it barely gives you 5. This is why most old people tell tales of how they bought seemly expensive things today with only a few cents during their time.
Our current rate of inflation is 4%, this is a really high number, economists recommend that inflation must always be kept under 2%. This means that the price of goods and services increases by 4% each and every year. You need to spend an extra 4% next year when buying the same goods you bought this year.
Why does it happen
There is a number of reasons why inflation happens, the most commonly known one is the extra circulation of cash. Here are some of the reason why inflation happens.
Cost Push inflation
Cost Push inflation happens when the cost of doing business increases, the business pushes these extra costs to the consumers. Workers might demand higher wages; the business has to compensate for this increase in expenses by increasing its prices. An increase in cost of production will trigger a cost push inflation.
Demand-Pull inflation
Demand-pull inflation happens when there is an increase in demand for goods and services but supply remains the same. This usually happens when people are getting richer and have more money to spend or when the government reduces taxes and people have more disposable income.
This type of inflation is similar to the government just printing out more money, because the money in circulation becomes a lot while goods are few. This means that people have to ward off competition to get the same good or service. Demand increases prices.
Government printing more money
The government prints out more money to stimulate the economy and create more jobs. Robert Mugabe printed more money so that he could afford to pay his soldiers during the war with Congo. This is something that often leads to hyperinflation if it goes unchecked.
It usually takes a long time before inflation starts kicking in, during this period, people have more money to spend while the cost of goods and services are still the same. The downside to this is that prices will rise up eventually, because there is too much cash chasing a few goods and services.
How does inflation affect households?
Inflation affects each and every one of us, the money that we have loses purchasing power each and every year. All this while income levels remain stagnant or grow at a very slow pace for most people. Our cost of living increases each and every year.
White Albany bread costs R15 today (2020) in South Africa at most retail stores. The same bread will cost R72 in 40 years’ time at this rate of inflation. Renting a 2-bedroom apartment costs around R4 500 in most cities in South Africa. This will rise to R21 600 in 40 years’ time at the current rate of inflation.
The average salary increase for most employed professionals is around 5%, but it doesn’t paint the whole picture. It’s important to remember that South Africa is the most unequal nation on Earth. Averages don’t really paint a clear picture of the reality that most people face. Example, the average salary in South Africa is R22 000, yet over 90% of the population doesn’t even earn R7 500.
A lot of people barely get any increase on their incomes, this usually goes on for years. Which negatively affects their lives as the prices of goods and services keeps rising.
Hyperinflation
Hyperinflation happens when the price of goods and services increases by more than 50% per month. At some point, prices of goods and services used to increase by 98% in Zimbabwe every day. This means that prices doubled every night. At this point there is basically no hope for the citizens. Your money becomes virtually useless.
People in Venezuela are now selling off their money to tourists, the money is basically worthless. Tourists buy the money just for decoration purposes, that’s the danger of hyperinflation. Your money loses value even when it is stacked in a bank.
Conclusion
Inflation is something that each and every one of us should pay attention to and try to protect ourselves from it. Do you have any thoughts or questions? Comment below.
