Why you should care about the impact of inflation

Julie Brownlee, Fsp Invest, 17 Mar. 2015

Tags: inflation, consumer inflation, what is inflation, impact of inflation, inflation and savings, real interest rates, interest rates,

Tomorrow, Stats SA will release its consumer inflation data for February.

So what is inflation? And why should you care about the current rate of inflation?

Read on to find out…

What is consumer inflation?

In South Africa, the consumer price index (CPI) measures consumer inflation. Stats SA are responsible for measuring the data and publishing it on a monthly basis.

Stats SA measure the changes in price of a number of different goods and services that consumers buy and use. In other words, Stats SA try to measure how the cost of living changes on a monthly basis for Mr Average.

Of course, chances are your spending behaviour will be different from the one Stats SA bases its calculations on, but the rate of inflation gives you a way of measuring the changes in the cost of living.

Over the past few months, inflation has fallen thanks to the sharp drops in the petrol price and moderating food prices.

Why you should care about the current rate of inflation

The current rate of inflation will have an impact on your life. If inflation is rising rapidly, you’ll notice that products you buy or services you use will rise in price.

When inflation is rising, your rands won’t go as far as they did before. It will dent the money you have in your pocket.

Inflation also has an impact on the cash you hold in the bank. If you have money in a savings account for example, rising inflation will eat into the amount of interest your cash is actually making.

For example, let’s say you have R10,000 in the bank. If you’re earning 5% in interest on your savings and the current rate of inflation is at 3%, you’re actually making 2%. This is the real interest rate (rate of interest – rate of inflation).

On the other hand, if inflation rises to 6% and you’re still earning 5% in interest, you’re losing money. Your cash in the bank is losing its spending power.

So there you have it, why you should care about the impact of inflation.

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