Inflation & Interest Rates

Typically, inflation and interest rates are in an “inverse” relationship: When rates are low, inflation tends to rise. And when rates are high, inflation tends to fall.

Moneyweb recently wrote “increasing the cost of credit will reduce the demand for it and therefore slow down the pace of ‘new money’ entering the economy via credit channels. This slowdown of funds entering the economy via credit channels will slow down the inflation rate as less money chases the same amount of goods.”

But, despite the logical and logarithmic reasons, hikes in interest rates in the country are a bitter pill for many who already have financial burdens. The grassroots reality is that whilst a higher interest rate may ensure a better return on our hard-earned investments, inflation can have an opposite devastating impact on one’s savings and investments.

This is because inflation is not just about the increased cost of fuel, utilities, bread and milk; it is the rate at which your money depreciates over time as the cost of living increases. The immediate impact of inflation is what we feel everytime we tap our card or phone at the check out, the delayed effect is felt when our long-term investments are no longer sufficient to support our lifestyles.

Three time-honoured strategies to help with the long-term impact of inflation and increased interest rates are dollar-cost averaging, taking a long-term approach and diversification (including alternatives that are not market-linked).

Cedrick Pila, regional manager at Allan Gray, recently said that if you want to achieve real capital growth that takes inflation into account then consider different alternatives rather than just putting your money in the bank.

However we look at this, we need to fundamentally look at our behaviours and make changes where needed. In the immediate environment, we need to look at how we are earning and spending our money. For many of us, we can’t simply keep things as they are; we either need to cut back on spending, or generate additional income.

For the future, we need to work closely with our trusted financial adviser in order to tweak and adjust our diversified investment portfolio according to our personal needs and event horizons. 

Inflation and interest rates will always affect the value of our money, we cannot afford to close our eyes and hope for the best. If you’d like to connect and chat some more about this, please feel free to reach out and let’s set up a meeting.