R7.00 for a McDonald’s Big Mac 

In 1995, a South African could buy a Big Mac from McDonald’s for R7.00. Today, the same burger costs R56.90. 

This is largely due to inflation eroding South Africans’ purchasing power and steadily eating away at the rand’s value over the past 31 years. 

A similar story has played out with other South African favourites. Spur burgers, for example, used to cost 30 cents in the 1970s. 

While South Africa has a world-class Reserve Bank and has historically contained inflation, it can only limit how quickly purchasing power is eroded. 

The example of inflation’s impact on a single product is often used by economists and investment specialists to illustrate just how devastating inflation can be. 

It is a useful reminder for individuals saving for retirement that their investments must outpace inflation to maintain their purchasing power. 

This is crucial for retaining your quality of life in retirement and avoiding the need to significantly alter your lifestyle in later years. 

In an analysis of the impact of inflation, Ninety One said this shows that investors cannot afford to hide their savings in cash or fixed-income investments. 

These may beat inflation in the short run, but over the long term, they will be outpaced by inflation, eroding your purchasing power. 

Ninety One explained that it is also not enough to outpace Stats SA-defined inflation, as the price of basic foodstuffs tends to far exceed that. 

For example, the price of a Big Mac has risen at a compound annual rate of 7% even as the Reserve Bank has kept inflation below 6% for much of the past 30 years.

The increase in other products is more pronounced, with Ninety One showing that Sunlight Liquid and Sta Soft have risen by 8.4% and 9.5% annually, respectively. 

In other words, the 9.1% rise in its basic household goods basket is far above the average inflation rate for the same period. 

Ninety One said that this shows the personal experience that inflation is higher than the official reading is closer to the truth than many think. 

It also raises the bar investments have to clear to maintain purchasing power and ensure retirees can live their golden years in comfort. 

The graph below shows the purchasing power of R100 in 1961 and today.

Investment in equities

This makes the case for investing in equities, which have historically delivered returns that exceed inflation. 

Beating inflation enables one to grow wealth, improve purchasing power, and retire without sacrificing quality of life. 

“The great villain of investors is inflation. As prices rise, the value and quality of the goods and services your money can buy declines,” Symmetry chief investment strategist Izak Odendaal said. 

Odendaal’s analysis of returns on the JSE and American stock markets shows that they have consistently beaten inflation over the past 100 years. 

His calculation shows that the JSE turned R100 of today’s money into R229,000 over the past century. Its American counterpart turned $100 into $317,000 over the same period. 

This is despite the last century seeing numerous crises that would have driven investors to exit the stock market. 

In South Africa, for example, the past century included the rise and fall of apartheid, global isolation, political uncertainty, and many booms and busts. 

“There were many scary moments along the way. At no point did it feel inevitable that the market would continue rising,” Odendaal explained. 

“However, the data show that over the long run, equities are on a relentless march upwards, despite short-term volatility.”

If money is left to compound in global equities, its growth will outpace inflation over the long term. 

This makes it critically important to not interrupt the compounding process as that undermines the power equities hold. 

“Where do the riches come from? Not from the gods of Olympus, but from the magic of compound growth,” Odendaal explained. 

“Equity prices are driven by sentiment in the short term and can fluctuate wildly over days, weeks, and months.”