Inflation and interest rates will have a devastating effect on consumers’ wallets

IOL reported a few months ago that middle-class South Africans spend 80% of their salaries in five days. Picture: Nadine Hutton, Bloomberg.

IOL reported a few months ago that middle-class South Africans spend 80% of their salaries in five days. Picture: Nadine Hutton, Bloomberg.

Published Aug 29, 2022

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By Kaveer Beharee

The big issue to think about is to know that you are not alone and to know what you can do if you are struggling to make ends meet. IOL reported a few months ago that middle-class South Africans spend 80% of their salaries in just five days. Is it any wonder that people are going into debt just to cover living expenses?

Just a reminder, Statistics SA reported last week that annual consumer inflation reached another 13-year high, increasing to 7.8% in July from 7.4% in June.

But don’t be fooled by those numbers. The real story for the average South African is much worse. Food inflation, transport inflation and administered price inflation – the three categories that affect people’s lives and spending the most – increased 10.4%, 24.9% and 19% respectively in July, when compared to July last year.

If you have not heard the term administered prices before, those are the prices of products of services that you use that are directly controlled by the government – things like electricity, the fuel price, and rates and taxes.

What this means is that while the government is significantly responsible for higher inflation on the one end, it is increasing interest rates on the other end to reduce inflation. The South African Reserve Bank’s primary mandate (which is given by the government) is to keep inflation below 6%.

However, the mechanism by which our central bank can reduce inflation is by dampening the demand for goods and services. It does this by increasing the cost of credit, vis-à-vis, increasing rates. But this is a blunt instrument that destroys people’s lives, which drives up the cost of debt servicing – putting lower income people at significantly higher risk of going into financial distress.

This is a tough pill to swallow considering the government itself, is responsible for higher prices.

The question you might be asking is, why is the government increasing hardship not doing more and what can be done to alleviate high prices increase without decimating poor and middle class families?

Two decades ago I was a young economic journalist pondering the same questions with the country’s top economists. It is important to understand that these challenges, South African monetary and economic policies is a puzzler, are not serving our country well.

The simple answer to the question above; the government could do anything besides what is doing now. For example, one of the easiest things the government can do to alleviate inflation is change fuel pricing regulations, where every player across the fuel supply value chain is guaranteed set regulated prices. This eliminates all competition. Somehow our government fell for claims of oil security concerns, which somehow led to risk for oil majors being eliminated by very favourable regulations, competition exemptions and guaranteed prices at the pump.

As trucks move goods and you will always need to get to work, you are a captive consumer. And captive consumers are great for governments who want more tax revenues, which in South Africa, makes up a considerable component of the fuel price – which is higher than the average American fuel price.

So, as a consumer, what are your options and what can you do? I hate to be the bearer of bad news, but tough economic times lie ahead.

From the attached graph from the IMF (International Monetary Fund), you can see that global interest rates are on an upward trajectory. Rising inflation does not slow down rapidly, due to expectations by workers and businesses, which respectively demand higher wages and charge higher prices, which inadvertently keeps inflation higher for longer.

This inflation shock, was precipitated by many global events including manufacturing and transport bottlenecks around the world, which started with the Covid-19 pandemic and who knows how long it will take to address the underlying causes. During uncertain times, the first point is tighten your belts. Many of the underlying factors inflation are here to stay.

Funding your lifestyle through credit is a bad move, but for many households, it might be necessary and unavoidable. However the one commodity you should never purchase on credit is food – which may require some sacrificing, lifestyle changes and meal planning.

Cutting down on your debt repayments is a viable way to ease your cash flow. There are numerous options available to you. I spent more than a year and gave testimony in Parliamentary hearings around the National Credit Amendment Act deliberations. I also witnessed testimony by creditors, regulators and government debate issues around financial distress.

The message that came out strongly, is the staying silent and missing payments is the worse possible move you can make. You could start by calling your creditors to explain your financial position and work with your creditor on a repayment arrangement that is more affordable and manageable. You can also contact the National Credit Regulator at www.nrc.org.za for advice.

Their website is awful and not very helpful, but the NCR is mandated by law to help consumers.

Remember, you are not alone. Academic research shows that it is difficult to remain mentally astute when you are in financial distress. Consumer finances are in a mess around the world, with new survey from the US showing that 45.9% of Americans say that they would fall into financial distress in the case of an emergency, according to the Consumer Financial protection bureau analysis of the Federal Reserve Board’s survey of household economics and decision-making. It is important to seek help and speak about what you are going through.

Kaveer Beharee is the founder of Ubiquity AI – a behavioural-change fintech company.

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