A recent FNB research study showed that the high cost of living is limiting South Africans’ ability to save.
This issue has come under the spotlight with last week’s announcement by Statistics SA that the annual Consumer Price Index (CPI) inflation rate has increased to 6.3%.
“The change in the CPI between June 2013 and July 2013 is mainly due to the 9.4% increase in water tariffs; the 7.2% increase in electricity tariffs and the 84c/litre increase in the price of petrol. These are basic necessities which impact the pocket of almost every consumer and will certainly make their cost of living higher,” said Lezanne Human CEO of FNB investment products.
The South African Reserve Bank’s target band for inflation is between 3% and 6% and for the first time in 14 months, inflation now falls outside this target.
But Econometrix chief economist, Dr Azar Jammine, said September's CPI inflation rate is set to drop back quite sharply again towards 6.0%.
“The major contributor towards this expected volatility in the CPI inflation rate is the movement of the petrol price. Here, not only are the up and down movements of this year’s petrol price relevant, but as important are the corresponding movements in the petrol price last year,” said Jammine.
He added that with next month’s inflation rate there is likely to be a countervailing sharp decline in the petrol inflation rate and through this in the overall CPI inflation rate.
“This is principally because September 2012 was characterised by a huge 93c/litre increase, while as matters stand, the petrol price is likely to be reduced somewhat at the beginning of next month,” said Jammine.
Disposable income budget
Human added that one of the main issues with inflation is that salaries do not always increase at the same rate, making the disposable income of the consumer lower.
“The harsh reality is that consumers may find themselves tempted to borrow for everyday expenses. This could spiral into debt and diminish their ability to save. Our research shows that 73% of South Africans, who do not save, indicate that the high cost of living is the cause of this,” said Human.
She added that inflation causes the value of the consumer’s money to constantly decrease. This in turn makes planning and saving for retirement or education a stretched target.
Can investment products help?
Human said that many products on the market promise inflation beating returns, but with no capital guarantees and more importantly with associated fees that eat away at returns over time.
“Generally the interest-bearing cash investment products offered by banks don’t always allow a customer to keep up with inflation. This is a gap that we have spotted in the market. Our Inflation Linked Deposit account is a fee-free account that guarantees capital and saves a return of CPI plus 1%,” said Human.