Dealing with inflation

In a nutshell, inflation refers to the general increase in the price of services and goods in a country. This doesn’t necessarily mean everything increases, but it does indicate the annual overall percentage increase in prices.

Inflation in SA is measured using the Consumer Price Index (CPI): a person’s average spending or living costs. CPI is calculated by totalling the costs of a predetermined ‘basket of goods’ and services as used by an average South African. Inflation is calculated by then measuring the rise in the price of this ‘basket’ over 12 months, and expressed as a percentage.

In ‘demand inflation’, if the demand for a certain product/ service increases due to limited availability, the price for the product or service will rise.

In ‘push inflation’ the prices of goods rise due to a cost increase in the production line, such as labour or the overall cost of production. When the cost of production increases, the price of that product increases to ensure producers still make a profit on their goods. The main factors that tend to influence production cost include the oil price, the rate of exchange and salaries.

Other reasons for inflation are the price of imported goods and petrol. If the petrol price goes up, it affects you directly in filling up your car, and indirectly, as it leads to an increase in transport costs, which impacts the cost of all goods and services that rely on transport.

Learn to manage your finances better so you’re always in a position to handle inflation. Ensure you save properly and set aside a little nest egg to use when prices increase. Having an emergency fund will help ensure that you aren’t completely stretched when the costs of living rise.

Tackle debt. Ensure you’ve paid off any outstanding debts if possible (or at least always make your payments) and that you’re constantly looking to improve your credit score. A good credit score means you’ll be able to apply for credit (such as an emergency loan) if need be.

Consider your budget. If you don’t have one, set it up today. If you have one, have another look at it. Where can you cut your spending each month and save a little extra? Spend only what you need to and exercise the discipline to stick to your budget. That way, you can put any leftover money straight into your savings (like your emergency fund). Shirley Smith is COO at Old Mutual Finance This was first published on Old Mutual Finance’s blog