What is CPI and how does it affect consumers?

Statistics SA revealed headline consumer inflation slowed to 4.6% year-on-year (y/y) in July (June: 5.1%). StatsSA’s consumer price index (CPI) sets out the current prices of the average basket of goods and services in terms of the prices during the same period in a previous year. This shows the effect of inflation on consumer purchasing power.

The hypothetical basket comprises food, clothing, housing, transport and other regular expenses incurred.

Why should we be aware of CPI increases or decreases?

CPI tells us how much a given typical basket of goods and services costs at a certain time.

By comparing the basket’s cost with historical data, we can calculate inflation (sustained price increases). So, it serves as the indicator for general price inflation in SA.

If CPI increases faster than wages, or our purchasing power, the amount we can buy with our rands decreases and our quality of life is negatively affected.

Price inflation also affects savings and investments. If CPI exceeds the interest earned on an investment, it can erode the amount of savings over time.

Although we’ve seen a slight easing in the inflation rate, consumers must still be cautious with their spending and ensure their savings are keeping up with inflation. Many of us have “idle” money in various accounts not earning interest – you could actually be losing money. All your savings or investments should keep pace with, or exceed, inflation.

A good way to do this is by using a vehicle with voluntary premium increases, where you choose to up your premiums to increase the returns on your investment. If you contribute as little as R500 a month with inflation-matching annual premium increases, you could boost your future investment value by as much as 29% after 10 years (using 6% inflation). Work with a professional financial advisor to ensure you have a holistic financial plan targeting wealth creation.

Lizl Budhram is head of advice at Old Mutual Personal Finance