Inflation Slowing, but Why Doesn't Anything Feel Cheaper?

“A lower inflation rate does not mean that prices are returning to where they were a few years ago. It simply means that prices are now rising at a slower pace,” says Thys van Zyl, CEO of Everest Advisory Services.

“According to the Competition Commission, the price of electricity has increased by 85% over the past six years and the price of water by 68%, while general inflation increased by only 30%,” says Van Zyl, referring to the pressure that is particularly evident in expenses that households cannot easily avoid.

“These are expenses that a household cannot simply cut when the budget is tight. Household income still needs to cover a grocery basket, electricity, transport and other essentials that have become considerably more expensive over time, while your salary has not necessarily kept pace.”

According to Van Zyl, it is precisely the accumulation of these essential expenses that is increasingly weakening households’ ability to absorb financial shocks.

“When there is only just enough money each month to cover ordinary expenses, there is nothing left for unforeseen circumstances. A car that breaks down or an unexpected medical bill is then no longer merely an inconvenience – it can leave a household with little choice but to consider additional borrowing or other ways of covering the unexpected expense.”

Even the latest relief on the food price front tells only part of the story, according to Van Zyl.

“Food price inflation rose at its slowest pace in 16 years in July, according to Statistics South Africa. The Pietermaritzburg Economic Justice and Dignity Group’s average household food basket also declined by R50.72 to R5 479.80 in August. However, it was still R99.18, or 1.8%, more expensive than a year earlier.

“These figures show why the official inflation rate and people’s experience at the checkout can sometimes feel like two different worlds,” says Van Zyl. “When prices rise more slowly, that is good news. But for a household that has already cut its budget to the bone, it does not necessarily mean that there is suddenly money left over.”

Van Zyl warns that the greatest danger of sustained cost-of-living pressure is not simply that households can afford less today. As monthly budgets become increasingly strained, money intended for the future is often used to cover today’s expenses.

“It is understandable that people first pay the bill that is in front of them today. For some households, repeatedly reducing contributions towards retirement, emergency savings, medical cover or other long-term financial priorities to meet current expenses may have longer-term financial consequences.”

“Addressing cost-of-living pressures, however, may require more than simply encouraging households to ‘save more.’

“For many households, there simply isn’t money available to put aside. A useful starting point can be to understand where household income is being spent, distinguish between fixed and discretionary costs, consider the cost of different forms of debt, and identify whether any room can be created within the household budget.”

Van Zyl identifies three areas that households may wish to consider when managing cost-of-living pressures: reviewing budgets against current costs, understanding the cost of different forms of debt, and considering whether it is possible to build or maintain an emergency buffer over time.

“Effective household financial management in difficult times is not about perfection. It is about creating enough breathing room so that the next unexpected bill does not necessarily force you back into debt or push you even deeper into it.

“The latest inflation figures provide reason for cautious optimism, but households are likely to experience greater relief when income growth is sustained and begins to outpace the growth in essential household expenses, allowing financial buffers to be rebuilt.”