Wednesday, October 28, 2020

How inflation affects your cost of living

By Portia Nkani

You might hear a lot about rising and falling inflation and cost of living, but what do these terms really mean? And most importantly, how do they affect your daily life?

We may have to define the terms first; inflation and the cost of living. As a matter of fact, it is always important to note this as a consumer and observe how you spend, as this will also help in managing your finances/budgets.

According to Investopedia ÔÇô the world’s leading source of financial content on the web – these two may sound as the same, but in true definition they are not, although closely related.

Inflation is the most important factor; as the cost of goods and services rises, the buying power of the pula falls.

Inflation is not goods and services becoming more expensive. It’s really the money that we use to buy those goods losing value.

The inflation rate is often measured by the Consumer Price Index (CPI) ÔÇô a monthly measure by the Statistics Botswana that averages the cost of a representative basket of goods and services from areas around the country. It then reports the result as a percentage rise or fall.

On the other hand, cost of living refers to how much, in pula , it costs to maintain a certain standard of living and generally compares two different areas of the country.

This number averages the cost of an accepted standard of living that includes food, housing, transportation, taxes and healthcare. Cost of living is frequently used to compare life in different locations around the country or the world.

Impact on the Geographical Scale

The disposable income of households across different geographical locations differ according to means of income ÔÇô rural areas mostly derive their source of livelihood from agricultural activities, whereas in the north-east region, dependency is on tourism and hospitality industry; cities like Francistown and Gaborone will be mostly dependent on income from broader services sector and retail.

In terms of price dynamics as measured by inflation, the inflation rate dynamics for the rural, urban villages and town cities differ according to operational costs of businesses in those areas.

Looking at the latest headline inflation which is at November 2018, it increased to 3.8 percent from 3.6 percent in October.

It was the highest inflation rate since November of 2014, as prices rose further for transport housing & utilities and alcoholic beverages, tobacco & narcotics.

Economists generally believe that the high rates of inflation and hyperinflation are caused by an excessive growth of the money supply.

Low or moderate inflation may be attributed to fluctuations in  real  demand for goods and services, or changes in available supplies such as during scarcities. However, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth.

Today, most economists favour a low and steady rate of inflation.

Low as opposed to zero or negative inflation reduces the severity of economic  recessions by enabling the labor market to adjust more quickly in a downturn, and reduces the risk that a  liquidity trap prevents monetary policy from stabilizing the economy.

Some think tanks projects that inflation will remain contained and close to the lower band of target ending 2018 at 3.2 percent and will average 2.9% in 2019.

Administered prices, commodity prices, government levies remain a high risk to inflation.

After several years of gradual easing, the Bank of Botswana maintained policy rate at 5.0 percent in 2018, domestic fuel prices are a concern and should push inflation slightly higher in the short term.

However, previous interviews with the Sunday Standard Barclays Bank Botswana’s Economist Naledi Madala observed that several downside risks are expected to cushion inflation going forward, allowing it to remain modest over the medium term. It therefore appears unlikely that the current policy stance will be altered in 2019.

As so for Dr Keith Jefferies, Managing Director at Econsult firm also maintains that, inflation is likely to rise slightly due to fuel prices but will remain in the lower half of the Bank of Botswana (BoB)’s inflation objective range of between 3 and 6% and it is unlikely that there will be a need to raise policy rates in the next year.

Meanwhile, the latest Business Expectation Survey of September 2018 by BoB suggests that cost pressures are expected to increase slightly in the first half of 2019 largely owing to the anticipated increase in wages. However, firms just like the economists also expect inflation to remain stable and within range.

When the Going Gets Costly

It’s easy for most people to feel the effects of cost-of-living increases in their daily life. But rising prices hit the lower and middle classes especially hard. Higher food, fuel and utility costs mean less money remains once these necessities are paid for, leaving little for savings or discretionary spending. To compensate for the rise in prices, consumers tend to buy less, switch to less-expensive substitutes or drive farther to find bargains.

It’s especially difficult to keep up with the rising cost of living when your paycheck isn’t growing at a similar rate.

The harm from inflation is more delicate. It’s like termites chewing away at your home. You may not see the effects for a number of years but it’s there slowly eroding the wealth in your savings or investment portfolio without you realizing it.

Some employees have not had salary increments in 10 years, but the prices of goods have gone up, and their disposable incomes continue to shrink.

The Bottom Line

With pay increases lagging behind rising inflation, you can expect your wallet to continue to take a beating as the cost of living increases in just about every aspect of our daily lives. But try to keep your eye on the long term. Although you may need to cut back spending in some areas, don’t let today’s high prices discourage you from saving for tomorrow’s needs.

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