Understanding Inflation in South Africa: What Students Need to Know

Introduction

Last week, we discussed the importance of an emergency fund and highlighted an article from Old Mutual emphasizing that the interest rate on your savings should at least match inflation. But what exactly is inflation, and why does it matter to you as a student?

What is Inflation?

Inflation is the overall increase in the price level of goods and services in an economy over time. The inflation rate measures the percentage change in prices, affecting everything from groceries to tuition fees.

The challenge with inflation is that incomes and prices don’t always rise at the same rate. If prices increase by 6%, but your income only grows by 4%, you’re effectively losing purchasing power. However, if your income grows by 7%, you’re financially better off. This principle applies to salaries and the interest earned on savings, including emergency funds.

What Causes Inflation?

Prices are determined by supply and demand, competition, and broader economic factors. Inflation can be triggered by:

Demand-pull inflation: When demand for goods exceeds supply, leading to higher prices.
Cost-push inflation: When production costs (like wages and raw materials) rise, businesses pass these costs onto consumers.
Exchange rate fluctuations: A weaker rand increases import costs, pushing up prices.

For example, a drought may lead to higher food prices, while an oil production surge could lower fuel costs. Inflation doesn’t affect all goods equally.

How is Inflation Measured?

Inflation in South Africa is tracked by Statistics South Africa (Stats SA), using the Consumer Price Index (CPI). Each month, Stats SA measures the prices of a basket of goods and services, representing typical urban consumer spending. The basket includes essentials like food, transport, housing, and education.

You can read more about it at https://www.statssa.gov.za/?cat=33

Income Tax and Inflation

Even though South Africa’s income tax tables have remained unchanged, inflation can still increase your tax burden. This happens through bracket creep, where inflation-driven salary increases push earners into higher tax brackets. A MoneyWeb article demonstrated this concept with calculations showing how unchanged tax brackets can result in higher effective taxes over time.

Read about bracket creep at https://www.moneyweb.co.za/financial-advisor-views/what-is-tax-bracket-creep/

What is Deflation, and Why Can It Be Harmful?

Deflation—the decline in overall price levels—might seem beneficial at first, but it can harm economic growth. When prices continuously drop, consumers delay purchases, expecting even lower prices. This reduces business revenues, leading to job losses and slower economic activity.

Inflation Targeting and the Role of the South African Reserve Bank

South Africa follows an inflation-targeting framework, with the South African Reserve Bank (SARB) aiming to keep inflation within a target range of 3% to 6%, with a preferred midpoint of 4.5%. This policy is designed to ensure price stability, safeguard consumer purchasing power, and support long-term economic growth.

To achieve this, the SARB uses two key monetary policy tools:

The Repo Rate: This is the interest rate at which commercial banks borrow money from the Reserve Bank. When inflation rises, the SARB increases the repo rate, making borrowing more expensive and reducing consumer spending, which helps to slow inflation. On the other hand, if inflation is too low, the SARB cuts the repo rate to encourage borrowing and spending, stimulating economic activity.
Bond Issues: The SARB can issue government bonds to absorb excess money from the economy, reducing inflationary pressure. Conversely, buying back bonds injects liquidity into the financial system, which can help boost economic growth when inflation is low.

Interest rates tend to increase when inflation rises, because higher interest rates discourage excessive borrowing and spending. This helps control price stability, ensuring that inflation remains within the target range.

There has been recent discussion about potentially lowering the inflation target to 3%, as some policymakers believe a lower target could improve currency stability and long-term economic performance.

Here are some articles that may be of interest to you.
https://www.resbank.co.za/en/home/publications/publication-detail-pages/statements/monetary-policy-statements/2025/may

Inflation and the Rule of 72

The Rule of 72 helps estimate how quickly inflation erodes the value of money. You divide 72 by the inflation rate to determine how many years it takes for purchasing power to halve.

For example, with an inflation rate of 5%, the calculation is:
72 ÷ 5 = 14 years

This highlights why interest rates on savings must at least match inflation to preserve purchasing power.

Conclusion

Inflation directly impacts university students—whether through tuition costs, rent, or daily expenses. Understanding inflation helps you make smarter financial decisions, ensuring your savings and future earnings retain their value over time.