It depends on who you ask, really.
An economic graduate will say:
“It is the end result of too much money chasing too many goods. The Purchasing Power Parity of consumers reduces over time, reducing the relative value of Rands in your hands.”
A dietitian will say:
“Inflation is a lot like food. Too little food and you will not survive. Too much food and you will not stay healthy for very long. There is a sweet spot somewhere in-between these two extremes where the economy is on a good, healthy balanced diet.”
A retiree living off her capital will say:
“I bought my first house for R 20,000. Have you seen house prices lately? All the prices are going up all the time! I cannot buy the things I want for with the Rands I have because they are just too expensive.”
An investment analyst will say:
“Inflation is that evil force that chomps away at your capital as time goes on.”
As a practical example, we’ll look at the cost of a loaf of white bread. Today, this item costs an average of R11.00 in grocery stores. How many loaves of bread could you have bought with that same Rand amount going back 20 years? This graph should you give you a fair idea:
So if Inflation is this force to be reckoned with, but something that is also necessary for the economy to be healthy, how do we deal with it to ensure that the capital we worked so hard for does not become worthless over time?
The answer lies in investing in inflation-beating assets, without accepting undue risk that could put your capital at risk of permanent loss. This is a tricky exercise when taken on in your personal capacity, and we continuously see investors who revert to Money Market investment strategies due to their ill-advised understanding of risk and returns.
If you stuck to a Money Market investment strategy over the last 10 years in order to avoid risky investments, have you been able to beat the capital munching monster that is Inflation? Probably just. If you are a retiree drawing an income from your capital, have you been able to take an income and grow your capital over the last 10 years by investing exclusively in Money Market investments? Extremely Unlikely.
How long can your capital sustain your current income-drawdown, before being depleted completely? These are important questions one should be asking!
The last thing anybody wants to see happen is outliving their capital, and this is why it is pertinent that you seek out professional financial advice when managing your retirement income plan.
