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Why you should care about inflation

by , 23 July 2013

Tomorrow morning, Stats SA release the Consumer Price Index (CPI) figure for June. This indicator shows the current rate of inflation in South Africa. Read on to discover exactly what CPI is and what it means for you…

The most commonly quoted inflation rate in SA is the Consumer Price Index (CPI).

It measures the changes in prices of a representative basket of goods and services.

CPI shows how Mr Average’s monthly living costs change

It’s really an attempt to measure how the cost of living changes for Mr Average’s household, explains Gareth Stokes in Fear, Greed and the Stock Market.

The problem is that Mr Average is a statistical artifice. He smokes, drinks and gambles according to the average person, pays rent and has a mortgage, owns a car, buys diet meals and eats fatty foods.

Of course, your spending behaviour may differ markedly from the average, but it gives you a general guide.

CPI is the best guide we have for measuring the changes in the cost of living.

You can work out your own CPI by just noticing what’s in your monthly household consumption basket. This includes your grocery shopping and petrol for your car.

For instance, since the fuel hike at the beginning of the month, it’ll cost you more to fill up your car. This means your CPI will increase.

Why should you care what the current CPI is?

Knowing what the inflation rate is, is important so you know what best to do with your money.

For example, think about your savings in the bank.

Suppose the inflation rate was 7%. If the interest rate in your deposit account is 7%, the real interest rate would be zero.

You’re earning nothing on your savings.

When real interest rates are zero (or negative, when the available interest rate is less than the inflation rate), it makes no sense putting your money in savings. You’ll actually lose money over time.

When inflation increases, it eats into your available cash. High inflation means a higher cost of living.

Bottom line: It’s important you know what CPI is so you can make informed decisions about what to do with your money.



Why you should care about inflation
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