The Financial Coach™ - Managing people & their emotions around money » Inflation

You can fool some of the people some of the time…

Gregg — Wed, 13 Jul 2011 07:39:42 +0000

I see that union members are striking over what they perceive to be an unfair wage increase offer of around 7%…they want somewhere between 11 and 20% (depending on who you read) while the official inflation rate is closer to 4%.

On the face of it their demand seems unreasonable and their rejection of the increase which is already 3% more than inflation also seems ungrateful…or is it?

The problem we have (and that the Reserve Bank has) is that hardly anyone believes that inflation really is 4%. This may be the official figure as released by Stats SA and it may be the measure of the change in the “inflation basket” but for most people in South Africa, that basket is a theoretical one which bears little resemblance to reality for ordinary people whose cost of living has increased by much more than 4% pa.

At 4%, the official inflation figure is unbelievable and does not reflect the actual year on year increases for the average South African. No wonder the unions demand more…I would too!

Electricity increases…

Gregg — Wed, 24 Feb 2010 12:31:51 +0000

So Eskom’s been granted increases of 24.8%, 25.8% and 25.9% for the next 3 years. Not as big as they wanted but still significant. What does it mean for us as consumers?

There is a beautiful little rule called the “rule of 72″ which states if you want to know how quickly something will double in value/cost you need to divide the number into 72. So based on this, an increase of 25% means that the price of electricity will double just under every 3 years (72/25 = 2.9).

So if you are currently paying R3oo for electricity then this will increase to about R600 in 3 years time (see the tables below for the actual figures). Basically, the cost of electricity will double over the next 3 years and while this may not seem like a lot to you and me right now, the real cost will come through in the related inflationary effects and only time will reveal what that will be.

So as we say in our house when ever you leave a room at night “Eskom thanks you for turning off the lights”.

Anyone seen the fat lady?

Gregg — Wed, 14 Oct 2009 14:43:44 +0000

So it looks like the “fuss” is all over and the equity market is set to run even further…I guess it is at times like these that you need to make sure you are “in for the ride” and not sitting on the sidelines watching it all go by. But it is also important that investors do a little “stock take” (pun intended) and understand/remember the following…afterall, has anyone seen the fat lady sing yet?

Investing takes time – equity markets can be extremely volatile – remember the past year? They can and do move rapidly in the short term (up and down) and so, if you don’t have time, you cant afford to invest into equities solely (diversify).
You cant time the markets – if you moved to cash a while back (after the market fell) and are still sitting there – sorry for you! You have missed the best part of the rally. You are either in or out – you cant be both and you cant time it right either!
Learn to ignore the noise around you – have a plan (know why you are doing what you are doing) and stick to it. Don’t be swayed by the noise.
Cash is not necessarily a “safe” or “low risk” option – it hardly ever beats inflation over time. And as an investor, inflation is your biggest enemy.
There are probably still some significant risks in the financial system – share prices have run hard in anticipation of earnings…there are plenty of people trying hard to talk the market up but if there are earnings disappointments then expect to see some more down days…
Inflation risk is still on the upside – big time – just imagine what the increase in electricity price increases is going to do to inflation (we are not alone in this – the UK is facing similar problems). Tradtionally high inflation is not good for shares…but it could still be a while before we see any siginificant increases in inflation.

Bottom line is this – have a plan and stick to it! If necessary find a good financial planner/coach who will guide you through this and coach you to stay the course.

The Financial Coach™