Is inflation experienced equally in South Africa?
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Key Takeaways:
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Inflation is when the prices of goods and services increase. It impacts everyone - but low income households are disproportionately impacted.
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Low-income households spend half of their annual expenditure on buying food. In contrast, high-income households spend less than 20% of their annual expenditure on food. This means that rising food prices impact low-income households more than high-income households.
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Food inflation has risen more than headline inflation in the last few years. This means that the prices of food have increased more than the prices of other goods and services. Since low-income households spend more on food, they are impacted more by increasing food prices.
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It is possible to hedge against inflation through purchasing and owning inflation-resistant assets. However, most South Africans do not own these assets - especially low-income households.
Inflation is a natural part of the economy. But it is not experienced equally.
Inflation is when the price of goods and services increase. There are a number of reasons why inflation occurs, including:
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The costs of production increase (for example, if the price of petrol increases, the price of transporting goods to market increases, and so the price of goods increases too).
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The economy grows. The economy can grow in a number of ways, but usually when business grows. Business grows when people buy more. When people buy more, businesses raise prices.
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Governments and firms raise wages to keep in line with inflation. As inflation increases, it costs more to buy the same goods. This reduces the value of wages. Governments and firms counter this by raising wages to keep in line with inflation. This allows people to buy more, which encourages further inflation.
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Low interest rates encourage borrowing. When the Reserve Bank lowers interest rates, it becomes cheaper for people to borrow money from local banks. This means that people have more money through borrowing, which encourages spending. As spending increases, prices increase.
The graph below shows the January headline inflation rate for South Africa between 1970 and 2024. The headline inflation rate is measured as the price of goods in January in the current year relative to January of the previous year. In 2024, for example, the January inflation rate was 5.3%. This means that prices in January 2024 were 5.3% higher than prices in January 2023.
Low-income households experience higher levels of inflation.
Statistics South Africa splits households into expenditure deciles, based on how much they spend annually. A decile is one of ten equal parts that a set of data is divided into, each containing 10% of the values. Households in Decile 1 (the lowest 10% of spenders) spend up to R20 140 per year. Households in Decile 10, on the other hand, spend more than R312 247 per year.
We can see from the graph that lower decile households experienced a higher inflation rate than high decile households in January. Why would this be the case though?
Households spend money on different things - and this differs by decile.
Households spend money on different things. There are different inflation rates for different expenditure deciles because people spend money on different things. In 2019, Statistics South Africa mapped how households in each decile spend money. Deciles 2, 5, and 9 are shown in the table below.
People in low deciles spend a higher proportion of their income on food, while high income households spend a higher proportion of their income on housing and utilities. In 2019, people in Decile 2 spent 50% of their total expenditure on food and non-alcoholic beverages, while people in Decile 9 spent only 17% of their total expenditure on the same. High-income people spend more on housing and utilities, transport and miscellaneous goods and services (which includes insurance). Low-income people spend a higher proportion of their income on food, followed by housing and utilities. This means that rising food costs impact low-income households far more than higher-income households.
In the past few years, food inflation has risen faster than headline inflation. This disproportionately impacts low-income households.
Between April 2022 and February 2024, food inflation was higher than headline inflation. Since low-income households spend a much higher proportion of their total expenditure on food than high-income households, higher food prices impact low-income households more.
Inflation is inevitable, but it is possible to protect yourself from inflation. However, few South Africans are able to do so.
It is possible to hedge against inflation through purchasing and owning inflation-resistant assets, such as stocks, bonds and property. However, most South Africans do not own these assets - especially those in low asset deciles.
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The graphs below illustrate the differences in asset possession, and asset value, between lower and higher asset deciles in South Africa. The most valuable assets for households in deciles 1-3 are possessions and vehicles. In contrast, higher deciles demonstrate greater access to diverse assets. For instance, Decile 10 has substantial property holdings and retirement annuities. Possessions make up a small portion of their total asset wealth. This indicates that while lower-income household's main assets are possessions, higher-income households are able to diversify their assets, including those that can better protect against inflation.
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Inflation impacts all South Africans - but it impacts them differently.
Inflation affects everyone, but low-income households are disproportionately affected. As inflation rises, essential costs, particularly food prices, rise more rapidly than general inflation rates, disproportionately impacting lower expenditure deciles. Furthermore, access to inflation-resistant assets is limited for these households, with many lacking ownership of property and retirement annuities. In contrast, higher-income households are better positioned to hedge against inflation through diverse asset ownership, including significant holdings in property and financial instruments.
References:
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Statistics South Africa. (2019). Consumer Price Index (CPI) Weights. Available: https://www.statssa.gov.za/publications/P01415/P014152019.pdf.
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Statistics South Africa. (2024). Consumer Price Index: January 2024. Available: https://www.statssa.gov.za/publications/P0141/P0141January2024.pdf.
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Statistics South Africa. (2024). CPI History. Available: https://www.statssa.gov.za/publications/P0141/CPIHistory.pdf.
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Southern Africa Labour and Development Research Unit. (2018). National Income Dynamics Study 2017, Wave 5 [dataset]. Version 1.0.0 Pretoria: Department of Planning, Monitoring, and Evaluation [funding agency]. Cape Town: Southern Africa Labour and Development Research Unit [implementer]. Cape Town: DataFirst [distributor]. DOI: https://doi.org/10.25828/fw3h-v708