Nasty shock of 'inflation illusion' on education, health care

Cape Town - Many investors suffer from “inflation illusion” and are in for a nasty surprise when they discover how destructive inflation can be with their savings over time, said Graham Tucker, Old Mutual Balanced Fund manager.

"Inflation is your enemy. You must, therefore, look at long-term investment returns in 'real' terms, taking into account the impact of inflation," he said at the launch of the annual Long-term Perspectives publication. It is a summary of long-term asset class data compiled by Old Mutual Investment Group’s MacroSolutions boutique.

The latest report clearly illustrates the impact of inflation. The average vehicle inflation rate in SA since 1990 has been 5.8%. Therefore, a mid-sized family sedan that cost R260 000 to buy in 2016, will likely cost R455 000 in 2026 and R1.05m in 2041.

As for parents willing (and able) to pay R200 000 for one year's tuition and board at a top Cape Town private school in 2016, due to the average private school inflation rate of 9.2%, they can expect to have to fork out R482 000 for the same tuition and board in 2026 and R1.81m per year by 2041.

READ: 7 lessons from long-term investment

The impact of inflation on private health care costs is also illustrated. At an average medical inflation rate of 10.1% since 1990, private hospital kidney dialysis costs for a year which were R180 000 in 2016, will likely end up being R470 000 by 2026 and R1.99m by 2041.

Inflation also wreaks havoc on the cost of food. The report illustrates how a Spur Burger that cost 30 cents in the 1970s, cost R72.90 in 2016. A cheddamelt steak jumped from 50c in the 1970s to R114.90 in 2016. Ricoffy cost 25c for 750g in the 1970s compared to R81.99 by 2016 and a can of Nestlé condensed milk was 10c in the 1970s compared to R22.99 in 2016.

"Similarly, 10 years ago you would have paid almost half of what it costs today for a basket of consumer goods. Twenty years ago it would have cost R292 to fill your trolley, compared with the mere R5 of 80 years ago," the report explains.

"If your retirement income does not at least grow in line with inflation, you will either experience a decline in your standard of living or you will run out of money."

At a 6% inflation rate, a fixed monthly retirement income of R10 000 a month today will decline in real terms to about R1 700 a month after 30 years.

"Your purchasing power is even worse at a higher inflation rate. This highlights how important it is to plan carefully and ensure that you invest to achieve inflation-beating returns in the long run," the report states.

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