Just for you: Do you actually understand inflation?

Inflation is a word that gets thrown around a lot, but surveys over the past decade indicate that the adult populations in many countries know relatively little about finance and are unfamiliar with economic concepts such as inflation, interest compounding, and risk diversification. According to a study published by the Human Sciences Research Council and the Financial Sector Control Authority, only 16% of adult respondents understood the concept of inflation.

Let’s start with a definition:

Inflation can be defined by two main factors: the cost of goods and services and the amount of money available in an economy. When people have more money to spend, inflation increases because they are able to purchase more items at higher prices. On the other hand, when there is less money to go around, inflation decreases as prices fall due to the decreased demand. Inflation is also affected by currency devaluation, which happens when a country’s currency loses value in comparison to other currencies – as is the current case with the South African rand.

How does inflation impact you?

You know when you go to buy something and suddenly the price is higher than it was last year? That’s inflation. When it increases, your money has less buying power. For example, if the inflation rate is 3%, something costing R12 today will be R12.36 in a year’s time. The current events in South Africa around wage disputes and labour unrest are indicative of a deeper issue – that wages are not rising at rates that surpass inflation. This phenomenon is compounded by the fact that other costs, such as healthcare, electricity, transport, and education, increase at a rate much higher than the prices tracked by the Consumer Price Index. Despite increases in wages in some areas, consumers still feel burdened financially due to these fast-rising auxiliary costs.

What does inflation have to do with life insurance?

In order to ensure that your cover keeps pace with increases in inflation over time, it’s important that your cover grows too, which means your insurance premiums will also need to rise over time. Inflation can also affect your ability to afford your cover, as rising costs put pressure on your pocket. Therefore, it is essential to consult a financial adviser when taking out a life insurance policy and maintaining your payments, so you can ensure your premiums and cover can keep up with your changing needs; this will make sure that your loved ones are always taken care of financially should anything unfortunate happen.

A financial adviser can help you

Many well-qualified financial advisers can answer your questions, provide clear explanations, and help you understand what you’re buying when it comes to funeral policies and life insurance. Financial advisers must meet strict regulatory requirements and be properly licensed with the Financial Sector Conduct Authority (FSCA) and product providers. You have the right to ask your adviser for their credentials and ask whether they are independent or work for a specific product provider. If you are dissatisfied with the advice you have received, you have the right to file a complaint with the Office of the Ombud for Financial Services Providers (FAIS Ombud). For more information, visit www.faisombud.co.za.

Test your knowledge:

1. What is inflation?

1. An increase in the cost of goods and services
2. A decrease in the purchasing value of money
3. All of the above

2. What factors do not affect inflation?

1. The exchange rate
2. Food and energy prices
3. All of the above

3. How can you protect yourself from inflation?

1. Speak to a financial adviser
2. Open a savings account
3. All of the above

Answers:

1. C
2. B
3. A