Inflation is your main enemy

Many investors suffer from “inflation illusion”: they don’t notice how destructive inflation can be over time, Long-term Perspectives says.

According to the publication, South African inflation has averaged 5.6 percent a year over the past 105 years, which compares unfavourably with the average inflation rate of 4.3 percent in the United Kingdom and 3.5 percent in the United States. South Africa’s inflation rate is more aligned with that of other emerging markets, rather than developed markets, the report says.

Old Mutual expects inflation to average 5.5 percent over the next five years, but there is risk that it could go higher, because South Africa is subject to the factors that affect the prices of goods globally, which are often denominated in US dollars, and this affects the rand and consequently the price of foodstuffs and petrol.

Inflation is calculated as an average for all the consumers in the country. If your expenditure is skewed towards components in the basket of goods that comprise the Consumer Price Index that have very high rates of inflation (for instance, education and health care), you will experience a much higher personal inflation rate than the country average. In this case, you need to save more for your future expenses. You need to remember this when you budget for how much you need to save for retirement, for example.