Inflation is ‘as violent as a mugger’ – here’s how to fight it

In 50 years, the price of a hamburger and chips has increased by more than 33 000%. Picture: Independent Newspapers.

In 50 years, the price of a hamburger and chips has increased by more than 33 000%. Picture: Independent Newspapers.

Published May 24, 2024


iN THE early 1970s a hamburger and chips at a well-known steakhouse chain cost about 30c. That same meal today will set you back over R100. In 50 years, the price of a hamburger and chips has increased by more than 33 000%. That’s what inflation does to your spending power over long periods.

Former US president Ronald Reagan said: “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hitman.” At the time he said it, in the 1980s, the US was emerging from a decade or so of high inflation, when it peaked at about 15%. South Africa, on the other hand, was just entering a high-inflation period – in the mid-1980s it peaked at about 22%.

Under Reagan, the US brought its inflation under control so that, up until a couple of years ago, it averaged between 2% and 3% a year. South Africa also gradually reduced its inflation, but not as effectively as the US. From about 1995 onwards, it has averaged between 5% and 6% a year, with wilder fluctuations than the US.

This low-inflation era ended as the Covid-19 pandemic came to an end, for a number of reasons. In the US, inflation shot up to peak at just under 10% in mid-2022, with a similar rise in South Africa, where it peaked at about 8%. Many governments, ours included, strenuously fought the uptick by upping interest rates. However, financial experts generally agree that, while inflation will probably stabilise as a result of these interventions, it will not return to its pre-Covid lows and will be “structurally higher” going forward.

Old Mutual Investment Group (Omig) recently released the 2024 issue of its Long-Term Perspectives Report, which highlights the importance of taking inflation into account when you are building up retirement savings and when you begin to live off those savings after retiring. The report, based on 94 years of data, looks at asset-class returns and inflation movements over this period to draw insights that inform Omig’s investment processes.

In the report, Omig portfolio manager Graham Tucker warns that, in an environment of structurally higher inflation, interest rates are likely to be higher than they have been in the past two decades. He cites demographics, deglobalisation, and decarbonisation as three broad, long-term inflationary trends.

Tucker says this will have an impact on investors and savers, because “in a higher-inflation world, your wealth is being eroded faster every year”.

Another example. A loaf of bread currently costs R19. If you are 25 and plan to retire at 65, and then live off your retirement savings for another 20 years, how much can you expect to pay for a loaf of bread in the future? At an average inflation rate of 5%, you will pay R134 when you retire at 65 and R355 by the time you reach 85. If the inflation rate is one percentage point higher (at 6%), a loaf of bread will cost you R195 when you are 65 and R627 when you are 85. Will your income have kept pace?

An investment whose returns keep pace with inflation will not grow in real terms. Investors need something that outpaces inflation over the long term, and the Omig report clearly shows that the asset class best suited for this is listed shares, or equities. However, it also shows that, although equities have delivered strong inflation-beating returns in the long run, being invested in the right equities has been crucial for investors over the past decade, with global equities outperforming their South African counterparts by a significant margin.

Although equities hold the greatest long-term promise, they are often volatile in the short-term, which can make investors nervous. The best way to manage short-term volatility risk is through diversification, which means spreading your investments over geographies, market sectors and asset classes. A well-managed balanced fund has a well-diversified mix of equities, bonds, listed property, commodities such as gold, and cash.

“Building a balanced portfolio of assets lets you have a smoother ride, as the negative performance of one asset is counterbalanced by the positive performance of others,” Tucker says.

This is borne out in the performance figures of the various asset classes over different time periods, as presented in the Omig report. Over the last five years, a balanced portfolio provided a real (after-inflation) annual return of 5.9%, while South African equities (as measured by the FTSE/JSE All Share Index) delivered 3.9%. Over the last 20 years, the balanced portfolio delivered 7.3% after inflation, and SA equities delivered 7.7%.