Inflation has risen for a second consecutive month and there are renewed concerns about a further interest rate increase.
It was actually expected that inflation would begin to subside and that interest rates would begin to gradually decrease towards the end of the year.
The inflation rate increased to 7.1% in March from 7% in February. Food and non-alcoholic beverage inflation accelerated 14% , the biggest annual increase since March 2009. A difficult few months lie ahead for consumers with interest rates expected to be hiked by a further 25 basis points in May. The interest rate increased by 50 basis points at the end of March. This was the ninth consecutive increase and the interest rate has been raised by 425 basis points since November 2021.
In an environment of rising inflation and high interest rates, investors must look for ways to save and grow capital in real rate terms.
“The higher inflation climbs the more your investments have to perform in order to beat inflation,” says Thys van Zyl, head of product development at Everest Wealth. “Inflation can affect some asset classes more negatively than others and reduces the purchasing power of your money over time. Diversifying your portfolio can help protect your investments from risk.”
It is important to know how inflation affects your investments and how you can protect your investment returns.
“It is also important to be consistent in your investment approach. Talk to your adviser who can help you modify your portfolio to keep up with fluctuations such as inflation and high interest rates. A well-diversified portfolio can help your investments outperform inflation.”
Van Zyl believes that if load shedding’s impact on inflation cannot be reduced, stubborn inflation will not be able to be brought down – even if the interest rate is raised three or four more times. “The interest rate has been raised so many times over the past 16 months and it is clear that it is not working to curb inflation.”
With inflation continuing to rise, interest rates will likely continue to rise and this does not bode well for consumers.
The interest rate hikes mean that consumers must reach even deeper into their pockets with credit card and store debt becoming more expensive and personal loans and car and home payments rising. Sharp increases in food prices also cost consumers dearly.
Consumers who took on the debt when the interest rate was much lower may now struggle to service their debt or simply cannot afford it anymore. However, the average salary in the country does not increase at the same rate and makes South Africans increasingly poor.
Interest rate increases affect investors positively and negatively. People with investments and money in the bank are positively affected by this, while an increase in interest rates is generally negative for stocks.
“With higher interest rates, everything becomes more expensive and this can result in people withdrawing more money from investments to keep up with rising living costs.”