Paul Hutchinson, Sales Manager at Ninety One, delves into the question of whether our personal experience of inflation aligns with official statistics.
Hutchinson examined a newspaper clipping from 1986, shedding light on the changing prices of household goods in the country.
He found that the sample of goods advertised in the paper rose at a rate of 9.1% - well above the official consumer price index (CPI).
While this analysis lacks the depth of a comprehensive study like the Big Mac Index and doesn't represent a full range of products, it offers valuable insights for financial planning.
Many of the items studied are Tiger Brands' products, largely unchanged since 1986, making them suitable for comparison.
By indexing South Africa's official inflation rate to 100 in 1986, a stark reality emerges: to maintain parity with this rate, one's income would need to have grown from R10,000 in 1986 to R150,000 today.
Ninety One compared the respective product price from 1986 to the current price, and then calculated the annual compound change from 1986 to current: In short, the average annual increase of 9.1% of this household goods’ basket is above the official annual inflation rate of 7.5% over this period.
"So, our intuition that our personal inflation rate is higher than what the official Stats SA inflation rate would suggest does not appear to be so far off the mark," said Hutchinson.
This discrepancy becomes even more pronounced over time. To match the rising cost of the household goods basket, one would now require an income of approximately R260,000, significantly higher than the previously estimated R150,000.
South African inflation rate versus that of a basket of household goods; 1986 to date
However, whether personal inflation rates outstrip official figures or not, the crucial consideration for investors lies in pursuing growth-oriented strategies rather than conservative approaches like cash holdings, said Hutchinson.
He said that investors often underestimate their investment time horizon, which could span several decades.
Thus, prioritising growth assets becomes imperative for generating attractive real returns over the long term, particularly given the goal of ensuring a comfortable and sustainable retirement.
Comments