Every year, your money buys a little less than it did the year before. That coffee that cost R25 last year might cost R27 today. That’s inflation at work. But what exactly is inflation, and why should you care about it as an investor?

Disclaimer: I am not a financial advisor. This information is for educational purposes only and should not be considered as financial advice. Always do your own research and consider seeking advice from a qualified financial professional before making any investment decisions.

Inflation is the rate at which the general level of prices for goods and services rises over time. When inflation goes up, your purchasing power goes down—each rand you own buys fewer goods and services than before.

Think of it this way: if inflation is running at 5% per year, something that costs R100 today will cost R105 next year. That might not seem like much, but over time, those small increases compound. After 10 years at 5% inflation, that same item would cost R163.

How Is Inflation Measured?

In South Africa, Statistics South Africa (Stats SA) tracks inflation using the Consumer Price Index (CPI). The CPI measures the price changes of a “basket” of goods and services that typical South African households buy—things like food, housing, transport, and healthcare.

The Reserve Bank targets inflation between 3% and 6%. When inflation stays within this range, it’s considered stable and manageable. When it shoots above target (like it did in 2022, reaching over 7%), the Reserve Bank takes action to bring it back down.

What Causes Inflation?

Demand-Pull Inflation

This happens when demand for goods and services exceeds supply. When people have more money to spend (whether from wage increases, government grants, or easy credit), they buy more. If businesses can’t keep up with demand, they raise prices.

Cost-Push Inflation

This occurs when the cost of producing goods and services goes up. Higher oil prices, wage increases, or supply chain disruptions all push costs higher. Businesses pass those costs on to consumers through higher prices.

Built-In Inflation

This is the self-reinforcing cycle where workers demand higher wages to keep up with rising prices, which then pushes prices even higher. It becomes a wage-price spiral that’s hard to break once it starts.

How Inflation Affects You

Your Purchasing Power

The most direct effect: your money is worth less over time. If you keep R10,000 under your mattress for five years at 5% inflation, it will have the purchasing power of about R7,800 when you finally spend it.

Your Savings

If your savings account pays 6% interest and inflation is 5%, your real return is only 1%. Inflation eats into the nominal returns you see. In high-inflation periods, you might actually lose purchasing power even while earning interest.

Your Investments

Inflation affects different investments differently:

• Cash and bonds: Usually struggle during inflationary periods, as fixed returns lose real value
• Shares/Equities: Companies can often raise prices, passing inflation costs to consumers, but profits may shrink if costs rise faster
• Property: Real estate often acts as an inflation hedge, as rents and property values tend to rise with inflation
• Commodities: Gold and other commodities are often seen as inflation hedges, though the relationship isn’t always direct

Your Debt

Here’s a silver lining: if you have fixed-rate debt (like a fixed-rate mortgage), inflation can actually help you. You’re paying back tomorrow with rand that are worth less than the rand you borrowed. Your debt stays the same in nominal terms, but its real burden shrinks.

How the Reserve Bank Manages Inflation

The South African Reserve Bank’s primary job is to protect the value of the rand. Their main tool? Interest rates.

When inflation gets too high, the Reserve Bank raises interest rates. Higher rates make borrowing more expensive, which slows spending and investment. Less demand means prices stabilize. The downside: higher rates can slow economic growth and increase unemployment.

When inflation is too low (below 3%), they cut rates to stimulate spending and investment. This boosts demand and pushes prices up toward the target range.

The Bottom Line

Inflation is a normal part of a growing economy. Moderate, stable inflation (the Reserve Bank’s 3-6% target) is actually healthy—it encourages spending rather than hoarding cash, and it gives the economy room to grow.

The problem comes when inflation is too high, too unpredictable, or both. High inflation erodes your purchasing power, distorts investment decisions, and creates uncertainty. Hyperinflation (like Zimbabwe experienced) can destroy an economy entirely.

As an investor, your job isn’t to fight inflation—it’s to account for it. Build it into your return expectations. Choose investments that have historically grown faster than inflation over the long term. And don’t keep too much of your wealth in cash.

Key Takeaways

• Inflation is the rate at which prices rise, reducing your purchasing power over time
• South Africa targets 3-6% inflation, managed by the Reserve Bank through interest rates
• Causes include excess demand, rising production costs, and wage-price spirals
• Inflation affects savings, investments, and debt differently
• Successful investing means earning returns that beat inflation over the long term