Inflation Protection: Safeguarding Your Finances in South Africa

Erynn
Jul 24, 2023
5 min read

Updated: May 16, 2024

After 20 years of low inflation and interest rates, there has been a significant increase in the last few years, with core inflation reaching its highest levels since 1983 at the end of 2022.

Our goal is to educate our clients and other South Africans about the challenges of inflation and empower them to take action. By making use of the services that we as financial advisers provide, you can ensure your money grows alongside or (ideally) ahead of inflation, safeguarding your financial future.

Disclaimer: Not Financial Advice

The content of this blog is for informational purposes only and should not be construed as financial advice. While we strive to provide accurate and up-to-date information, the rapidly changing nature of financial markets and regulations may cause some information to become outdated over time.

Consult with a qualified financial professional before making any financial decisions.

What is inflation?

Inflation is the increase in the overall price of goods and services in an economy, resulting in reduced purchasing power.

The Consumer Price Index (CPI) measures this by tracking the percentage of change in a basket of goods and services consumed by households. As prices rise, the value of money diminishes, impacting consumers' ability to buy certain goods and services.

What is inflation in South Africa?

South Africa's annual inflation rate was 5.5% at the end of 2023, within the South African Reserve Bank's target area. December saw a decrease to 5.1%, continuing a two-month downward trend. The 2023 average inflation was 6.0%, a little lower than 2022's 6.9%.

Over the past decade, South Africa's consumer price inflation averaged 5.2%, below the Sub-Saharan Africa regional average of 9.4%.

What is the expected inflation rate for 2024?

The expected inflation rate for 2024 in South Africa is predicted to be 3.2%, according to inflation forecasts and a Reuters poll of economists. Governor Kganyago anticipates a 5% average inflation, while the IMF expects a global inflation drop to 5.2% in 2024.

Statista notes stable inflation, projecting stabilisation of around 4.5% in the future.

What is the projected inflation rate for the next 5 years in South Africa?

The projected inflation rate for the next 5 years in South Africa is expected to reach 4.5% year-on-year in 2024, remaining stable through this period.

The SARB projects 4.5% in 2025 and 4.6% in 2026, with the headline inflation rate for 2024 varying between 5.0% and 5.1%. Investec and the Monetary Policy Committee both indicate a stable inflation outlook.

What is inflation protection?

Inflation protection involves safeguarding against the depreciating impact of inflation on investments, insurance, and pension payments. Investments like inflation-protected bonds adjust for inflation, insurance policies may include benefits increasing with predetermined percentages, and pensions may see periodic payment increases.

An inflation-protected portfolio aims to outperform during inflation, however, it's important to remember that 100% protection against devaluation is not realistic in any asset class.

What does it mean to protect your money from inflation?

Protecting your money from inflation involves avoiding long-term reliance on cash savings, as inflation erodes the money's purchasing power. Traditional cash savings are not typically ideal for long-term growth, as their interest rates often lag behind inflation.

What is an inflation-protected investment?

An inflation-protected investment offers protection against rising prices, adjusting with inflation and providing a hedge against the erosion of purchasing power.

Here are some examples of the most popular inflation-protected investments:

Inflation-Protected Securities (IPS),
Inflation-Linked Bonds (ILBs),
Treasury Inflation-Protected Securities (TIPS),
Real estate

Are inflation protected funds a good investment?

Yes, inflation-protected funds are a good investment, as they provide valuable inflation safety nets. While some may have lower yields, they nonetheless offer protection in inflationary periods.

ILBs, besides inflation defense, also serve as diversifiers, lowering overall portfolio volatility. Investing in Inflation Linked RSA Retail Savings Bonds can be a secure way to keep up with the rising cost of living. However, it's essential to note that no investment group guarantees complete protection against devaluation. You should consult your financial adviser before making any decisions.

What are Inflation-linked bonds (ILBs)?

Inflation-linked bonds (ILBs) are debt securities issued by governments, like Inflation Linked RSA Retail Savings Bonds in South Africa. They are linked to the Consumer Price Index (CPI) and offer a guaranteed above-inflation return if held until maturity.

The modern ILB market started in the 1980s, with the South African government issuing ILBs since 2000.

What is an inflation-linked annuity?

An inflation-linked annuity is a guaranteed monthly pension with annual increases tied to the Consumer Price Index (CPI) or Retail Prices Index (RPI). This helps protect against rising prices, ensuring retirees can maintain their standard of living.

How can we protect ourselves from inflation?

There are several strategies your financial adviser may employ to protect against inflation:

Diversify Your Portfolio: Spreading risk across different assets mitigates inflation's impact. Different assets respond differently to inflation, reducing overall risk.
Inflation-Indexed Securities: Investing in instruments that adjust with the Consumer Price Index (CPI).
Inflation-Proof Assets: Investing in assets that historically withstand inflation and deliver returns surpassing inflation rates.
Strategic Investments: Reallocating money into stocks, diversifying internationally, considering real estate, exploring TIPS, buying bank loans, and hedging against inflation for a well-rounded approach.

How do I invest to keep up with inflation?

To keep up with inflation, investors often:

Diversify investments across tangible assets
Maintain buying power with targeted securities
Have a diversified portfolio of stocks, bonds, and treasury bills
Use Inflation-Linked Bonds (ILBs) and ETFs for explicit protection
Add commodities to a well-diversified stock and bond portfolio.

What is the best hedge against inflation?

Common hedges against inflation include:

Gold: Often thought of as a safe haven, gold maintains its value during inflation.
Real Estate: Properties are considered a reliable hedge, as their values typically rise during inflation. Rental income is a potential passive income source, which may also increase with inflation. However, real estate performance can vary based on local market conditions.

In South Africa, common hedges against inflation include:

Diversified stocks
Gold
Real estate income
Commodities
Real Estate Investment Trusts (REITs).

What causes inflation?

Inflation results from a gradual increase in the prices of goods and services.

The causes of inflation include:

Increased Money Supply: A primary cause of inflation is excessive currency in circulation.
Demand-Pull and Cost-Push: Demand surpassing supply contributes to higher prices.
Monetary Theory: If monetary supply expands significantly relative to the economy's size, the currency's purchasing power diminishes, leading to rising prices.
Supply Chain Disruptions: Disruptions can affect the availability of goods, contributing to inflation.

Some factors that affect inflation include:

Monetary policy
International conflict
Changes in consumer purchasing practices
Increased wages
Higher production costs
Devaluation
Changes in exchange rates
Deglobalization
Inflationary demographics
Decarbonization

What are the effects of inflation?

Here are some effects of inflation:

Lost Purchasing Power: Inflation erodes the value of money, reducing what it can buy.
Higher Interest Rates: To combat inflation, central banks may raise interest rates, impacting borrowing costs.
Increased Prices: Inflation contributes to higher prices for goods and services.
Economic Decline: Inflation can hinder economic growth by reducing consumer and business spending.
Anti-Inflation Measures: Policies to curb inflation, like raising interest rates, may trigger recessions, impacting overall economic activity.

The guidance and expertise of a financial adviser, like ourselves, is highly recommended to manage the complexities of inflation protection. Partnering with us gives you the chance to benefit from our knowledge and personalized advice.