While rising prices and interest rates may be draining our pockets, for middle- to upper-income earners, things are not as bad as they have been in the past. We have lived through far tougher times.
In the late 1990s, the prime interest rate reached 25%, causing a mortgage crisis and mass repossessions of homes as people were unable to meet their bond repayments.
In the 1970s, the world lived through unprecedented fuel price shocks due to the energy crisis, and inflation raged out of control for decades.
Even our current food price inflation, which was recorded at 6.3% last April, is moderate compared with the drought of 2017, when food staples were increasing at a rate of 45% and the overall rate of food inflation soared to more than 12%.
We are certainly not expecting the kind of interest rate increases we saw in 1998, when rates went up 640 basis points in just three months, or even 2001/02, when the repo rate increased by 350 basis points, bringing the prime rate to 17%.
In comparison, the current interest rate cycle is expected to be relatively moderate. Rates are only increasing by 25 to 50 basis points at a time.
READ: Survive the cost of living crisis – what you need to do now
Over the entire rising interest rate period, which started in November, interest rates are expected to only increase by about 250 basis points in total, reaching a repo rate of 5.5% – which is still one of the lowest interest rates in our history and lower than pre-Covid levels.
As Stanlib economist Kevin Lings explains, the current inflation rate is nowhere near reaching the double-digit inflation rates that South Africa became accustomed to in previous decades.
“We used to live with double-digit inflation and volatile interest rates. Incomes did not keep up with inflation, which increased at 15% a year. The living standard went backwards in real terms,” explains Lings.
But, with the rapid decrease in inflation after 2003, many households saw real incomes rise and there was, to some extent, a wealth effect.
Since the end of the credit crisis in 2009, we have become used to a declining inflation and interest rate environment, and this is why, in part, we are experiencing stress around current events – we are not used to them.
Lings explains that the more moderate price and interest rate environment is partly due to the inflation-targeting practice of the SA Reserve Bank, which has kept inflation largely under control.
It has also been helped by a relatively stable rand, unlike during the 1998 emerging market crisis and the 2001 currency crisis, when the rand weakened significantly, resulting in major interest rate hikes to protect the currency and contain imported inflation.
“The benefit of inflation targeting has meant that prices have anchored at lower levels. We are also able to attract better capital flows, which helps to stabilise the currency, so the Reserve Bank has not had to act as aggressively on interest rates as in the past. There is also an awareness that, in fighting inflation, you don’t want to wreck economic activity,” Lings says.
Even our household debt levels have improved in the past few years as banks have pulled back on lending in recent years – for example, extension in credit card debt has been growing below inflation.
This is why banks are not worried about customers meeting their debt servicing costs, even if some individual households may be overindebted.
THE HOUSEHOLD REALITY CHECK
If the statistics are telling us things are not that bad, why are we feeling so much financial stress? Because our economy is in trouble – big trouble.
The main reason inflation is under control is because our economy is not growing. There is no demand pressure to keep prices inflated and companies are not making enough profits to meet wage demand increases.
Salaries are not keeping up with inflation and credit demand is low because people have stopped spending. When inflation is being kept under control due to a lack of economic growth, this is bad news for households.
One statistic that is markedly different from those previous high inflation/interest rate environments is our unemployment level, which is the highest in our history. We have still not recovered the 1.5 million jobs lost at the start of the Covid-19 lockdowns.
While the impact of rising fuel and food prices can largely be absorbed by middle- to upper-income earners, the impact on low-income earners and the unemployed is devastating.
Lings says the lowest 40% of income earners spend nearly half of their income on transport and food.
Inflation on public transport in April was 14%, so the inflation rate experienced by lower-income earners is higher than the middle to upper class when their main purchases experience significant price increases.
READ: SA mired in a cost of living crisis
Yet the knock-on effect of unemployment is being felt by middle-income earners too. They are responsible for supporting extended family who have lost their jobs and the increasing number of young people who are unable to find work.
Joblessness is why we should be worried about the future. Prices will moderate and, over the next year, we could even see fuel prices reduce. We could also see interest rates start to decline next year.
But, without economic growth and job creation, the pressure on households will only continue to grow.
We should be less worried about fuel and food prices, and a lot more worried about how we are going to create jobs and grow the economy.