SA's consumer price inflation (CPI) figure was released this week, showing a slight slowdown to 6.2% for the year to end of April 2016. This was in line with expectations. But do all South Africans feel the pinch equally? Investment economist Arthur Kamp investigates the perceived inequality of infl...See all articles
SA’s consumer price inflation (CPI) figure was released this week, showing a slight slowdown to 6.2% for the year to end of April 2016. This was in line with expectations. But do all South Africans feel the pinch equally?
The poor and the rich experience different inflation rates
Statistics South Africa publishes CPI for five expenditure quintiles (with the poorest consumers represented by quintile 1 and the richest by quintile 5). The overall CPI for the total country increased 6.2 % in the year to April 2016. However, for quintile 1 (the poorest group of consumers) CPI increased 8.2% in the year to April 2016. In large part, this reflects the effect of food price inflation (11.3% in April 2016), which carries a materially higher weight in the basket of goods bought by the poorest consumers relative to the richest consumers. The inflation rate for quintile 5 (the richest consumers) was lower than the national average at 5.9% in April 2016.
The inflation rate for the poor is volatile
The inflation rate for the poorest consumers tends to be volatile because a high proportion of their expenditure is on food. Food prices, in turn, tend to be volatile because they reflect changes in soft commodity prices (for example wheat and maize), the rand and other factors such as current drought conditions. Historically, when food prices have spiked the inflation rate for poor consumers has been higher than for rich consumers.
We’ve seen wheat prices in particular spiking
Currently, therefore, poor consumers’ real income will be under considerable pressure as bread and other food prices increase. The price of bread and cereals, together, increased strongly by 14.9% in the year to April 2016. Bread accounts for close to 50% of the bread and cereal component of CPI. The increase in bread prices partly reflects the spike in wheat prices over the past year. Wheat accounts for a relatively small component of the overall price of bread (other factors contributing to the price of bread would include electricity, transport costs, wage costs, other costs associated with production and profit margins). However, the price increase for wheat has been especially sharp over the past year and so it’s making a material difference. We import a material amount of wheat and therefore its price has been heavily influenced by the fall in the rand.
What do the latest inflation figures mean for investors?
Overall inflation for South Africans is only marginally above the upper limit of the Reserve Bank’s target range. Despite low growth forecasts for the country, the Monetary Policy Committee has twice raised the repo rate during the first quarter of 2016. This indicates that they are serious about containing inflation and providing SA businesses with certainty around future prices, which is necessary to model future earnings growth and profitability. This stable price growth environment will benefit investors.
While the current situation, where food inflation exceeds average inflation, affects the poor more, the argument for above-inflation wage increases (without accompanying productivity) does not necessarily hold. In 90% of the months from January 2008 to March 2016 food inflation was actually lower than headline inflation. Exceptionally high food inflation is a recent phenomon and only if sustained could it validate the demand for above-inflation wage increases. Accelerated wage increases would have a negative impact on companies that are – for various reasons – not able to pass all of the wage inflation on to the consumer. Investors who are invested in these businesses may find their returns come under pressure.
Source: Statistics SA and Daily Maverick
Previous article: Market update: April 2016
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Previous article: Equities – not for everybody
Your retirement years are something to look forward to. This is the time to spend with your grandchildren, pursue your hobbies full-time, or pursue whatever you find most fun and meaningful – at your own pace. But if you did not build up sufficient savings, this phase of your life could turn out to be highly stressful. How do you make sure that you’ve saved enough to enter your retirement years feeling confident and secure?
Postpone saving no longer
The sooner you start saving through your employer’s retirement fund or your private retirement annuity (RA) – or both – the better. It’s generally recommended that 20-somethings start saving 15% of their total income and continue to do so for at least 40 years to make sure they retire with enough. But if you start in your thirties or later, you would need to save a much larger percentage of your income every year to catch up.
Pay the taxman less
The less tax you pay, the more money you have left to save. But to qualify for tax relief you need to choose the right type of investment product. With products governed by retirement law, such as an RA or your employer’s retirement fund, you can now invest up to 27.5% of your annual income and enjoy tax relief on those contributions. Contributing more to your employer’s fund means that you’ll see an immediate reduction in the amount of tax that’s deducted from your monthly salary. With an RA you’ll have to wait until your tax return has been processed to see whether you’re due a refund from SARS. The best thing to do with that refund is to reinvest it, of course.
For more information on exactly how much you can save towards a retirement product and enjoy tax relief, watch this video on T-Day, the day on which the tax laws for retirement products changed.
Preserve your money
When you move from one employer to another you might be tempted to take all of your retirement savings as a cash pay-out, but remember the tax! Also, saving enough money for retirement is hard enough. Dipping into your savings at any stage could set you back significantly. The two most common tips that retirees have for younger generations are to start saving earlier and to preserve their savings every time they leave a job.
What should you do with your accumulated savings then? You have three options: a transfer to either an RA, a preservation fund or your new employer’s fund. You don’t pay any tax on a transfer to either an RA or a preservation fund. Once your money is in the preservation fund you’re allowed to make one (taxable) withdrawal should you run into financial difficulties, but with the RA you need to wait until your retirement date. You may decide to consolidate your retirement savings and transfer the money to your new employer’s fund so everything is in one savings pot. Just bear in mind that a provident-to-pension-fund transfer is not taxable, but a pension-to-provident-fund transfer is.
Professional help is a must
The closer you come to retirement the more important it becomes to consult a professional financial planner. He or she will be able to calculate the exact figure that you need at your desired retirement age and how much you need to save every year to reach that magic number. Equally important is the sound advice that you’ll receive to help you navigate the tax laws covering retirement products – both before and after retirement. We recommend that you speak to a financial planner rather sooner than later.
Prolong your working years
By working longer you’re able to save more towards retirement and it also means you’ll be living off your savings for a shorter period of time, enabling you to draw more retirement income every year. This living annuity table (page 2) provided by the Association for Savings and Investment SA is very useful to determine what percentage of your total savings you can withdraw if you want to maintain your income for a certain number of years. Postponing your retirement date is a great recipe for a more comfortable retirement.
Plan your post-retirement business
Because there’s no guarantee that your savings will be able to keep up with your living costs throughout retirement (especially if you enjoy extraordinary longevity), it’s a good idea to start working on a hobby now that could supplement your retirement income later. Starting a second or even a third career after the age of 60 is becoming more common and can re-energise you and refill your savings pot. (Read more about fulfilling your dreams in retirement).
A financially carefree retirement is built through a sequence of sound decisions throughout your life. Start planning for the best time of your life now.
Previous article: Market update: March 2016
April was the month of commodity price recovery. Oil, particularly, enjoyed plenty of attention. To address the recent oil glut, oil producing countries met in Doha mid-month, but an agreement to temporarily freeze oil output failed after Saudi Arabia refused to sign the agreement in the absence of Iran. Still, Brent Crude continued its price recovery to end the month 9.2% higher. Expect to pay more at your local petrol pump and your grocery store if this trend persists.
In SA, the political arena was as eventful as ever. In an unusual address of the nation on 1 April, president Zuma apologised for his handling of the Nkandla ruling by the Public Protector. During the month several financial institutions cut ties with Oakbay Investments, owned by friends of the president, the Gupta brothers. This happened shortly after allegations surfaced of the Guptas offering cabinet minister positions if the candidates agree to further the Guptas’ interests.
In terms of economic data, SA consumer price inflation decelerated to 6.3% y-o-y in March (data was released in April). Fruit and vegetable lovers felt the pinch most, with these prices rising by 18.7% for the year to March 2016. Some good news is that SA recorded a trade surplus of R2.9bn, including trade data with Botswana, Lesotho, Namibia and Swaziland.
Internationally, in the US the Federal Reserve decided to keep rates unchanged and chair Janet Yellen’s statement sounded more optimistic about global growth. In the East, Japan surprised markets by not accelerating its stimulus programme – for now. April was a particularly big month for Argentina, as it returned to the international credit scene for the first time since its default in 2001, selling $16.5bn in bonds to eager emerging market debt investors.
April was a month in which most markets traded upwards. The FTSE/JSE All Share Index gained 1.7% on a total return basis. With the 3.4% appreciation of the rand during the month, dollar investors in the ALSI gained 5.1% for April. The top performing sector for the month was Industrial Metals, gaining 45.4%, and the worst performing sector was Household Goods (-8.1%). The All Bond Index (ALBI) and inflation-linked bonds returned 1.88% and 3.29% respectively this month. Cash returned 0.57%.
Looking at global markets, the MSCI World Index and MSCI Emerging Markets Index posted a positive 1.6% and 0.5% respectively for April on a total return basis (USD).
Source: Stats SA, I-Net, Bloomberg, Deutsche Bank and Sanlam Investments | One-month total returns up to 30 April 2016
Related article: Market snapshot: March 2016
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