Inflation, unemployment and interest rates rising are an explosive combination, especially for those workers with poor -or non- salary adjustments. Incomes do not increase the same way debts do, and personal finances need to be constantly adapted to cover basic requirements.
According to the latest Debt Index, South African’s purchasing power has decreased 34% in 2022 if compared to 2016’s levels. This concept is essential to identify country indicators such as life standards and competitive salaries. So, do you know what purchasing power really means?
In simple terms, purchasing power represents how many goods and services can be acquired with a salary or another source of income (like a business). The thing with purchasing power is that, if monetary income remains the same -which is what usually happens with workers salaries- but the prices level increases, then the purchasing power of that salary will fall.
In the case of South Africa, several elements have contributed to this important loss. First of all, inflation can be seen as the main character of this context. Let’s remember that in July the Consumer Price Index (the indicator used to track inflation) reached 7.8%, the highest level since May 2008 when the rate was 8% during the world financial crisis.
In addition, workers are suffering with stagnant incomes. This is because salaries are not being able to follow the increasing levels of services and product prices. The situation prejudices the whole population, especially the middle class, that must pay all of their current bills with no new sources of income.
To complete the picture, interest rates grow even faster than inflation. For sure this isn’t a great moment to take personal loans. The Reserve Bank has recently raised the target, so the interest rates have increased by 75 basis points.
Of course this is all related and makes part of the same context. For example, the interest rate rise is nothing more than an attempt to reduce inflation. In fact, the South Africa’s Central Bank will raise its key interest rate again, adding another 25 basis points in each of the following two quarters before 2023.
How would that help? Well, even if inflation is a multifactorial process, it is well known that if demand gets low, then the prices of products and services would decrease as well. So, one way to reduce the demand is increasing the interest rates, then it will be harder for consumers to obtain the money necessary to buy and, eventually, the prices will be reduced.
The bad news is that, meanwhile these policies don’t show their results, citizens still lose their purchasing power and obtaining extra money by taking out a loan is also getting harder. As an alternative, the search for unsecured credit has increased. Approximately, South Africans have 22 percent more unsecured debt this year compared to 2021.