South African salaries worth less than ever before

Even when inflation is at South Africa’s current 4.5% target, prices will still double every 16 years, eroding the purchasing power of South African households.

Reserve Bank Governor Lesetja Kganyago said this is the reason the central bank is pushing for South Africa’s inflation target to be lowered.

Since 2000, the South African Reserve Bank (SARB) has adopted an inflation-targeting approach to monetary policy.

At the time, the central bank adopted an inflation target range of 3% to 6%, but stated that this target would be reviewed.

However, this did not occur until 2020, when the National Treasury commissioned a macroeconomic review conducted by two former central bank governors from Ireland and Cyprus.

Following this review, additional work was conducted by SARB staff, local and international academics, and Treasury staff.

In a recent interview with 702, Kganyago said these reviews showed there would be benefits to lowering and narrowing South Africa’s inflation target to around 3%.

To understand why this would be beneficial, Kganyago explained in the SARB’s Annual Report for 2024/25 that it is essential to understand the difference between price levels and inflation.

The price level is simply what you pay for a product, whereas inflation is the rate at which those prices change.

In other words, inflation shows how quickly or slowly the prices of products are rising. This is where an inflation target becomes crucial to manage.

Kganyago explained that an inflation rate of 6% – the top end of the SARB’s current target range – means prices double every 12 years.

When inflation is at the mid-point of the SARB’s current range, 4.5%, prices double every 16 years. However, at the SARB’s ideal target of 3%, prices would only double every 26 years.

“The main concern with South African inflation is not our ability to hit the target. Rather, it is that our target is high compared to other countries,” Kganyago said.

The governor stated that the current inflation target and its impact on price levels in South Africa are difficult to reconcile with the SARB’s constitutional obligation to safeguard the value of the currency.

“For this reason, we continue to make the case for a lower target, one that aligns with international peers and promotes price stability,” he said.

Investors paying the price

Inflation not only impacts households’ spending power over time but also significantly erodes investor returns.

Old Mutual Investment Group (OMIG) portfolio manager John Orford recently analysed the impact of inflation on purchasing power and investment returns in the asset manager’s Long-Term Perspectives report.

Orford explained that many investors suffer from ‘inflation illusion’, as they do not notice how it erodes spending power over time. 

Unless you grow your investments at least in line with inflation, you will face a declining standard of living.

Orford said that what matters is not whether your salary or investments increase in value, but whether they outpace inflation over time.

Since 1911, South Africa’s inflation rate has averaged around 5.4% a year, which is significantly higher than the 3.3% average in the United States, for example. 

This means that income and spending power have eroded faster in South Africa over the past 115 years.

Therefore, South African investors have a higher threshold to meet to generate real returns in the country. 

Higher inflation also results in higher yields on fixed-income investments, such as government bonds, to attract capital.

In turn, the government and companies pay a higher interest rate to service their debt, limiting the capital they can reinvest in future.

The same effects impact individual investors through home, car, and personal loans. It also means that investors must earn a higher rate of return to retire comfortably.

The impact of inflation on retirement income is illustrated in the graph below, which shows the eroding effect of different inflation rates on R10,000.

South African household income in US dollars

One way to examine South Africa’s household income and assess the performance over the last decade is to consider the real household income in US dollars.

In real US dollar terms, South African households are much poorer today than they were even in 2011.

In 2011, the real average household income in South Africa was $29,019. In 2023, it was only $11,058. This represents a 62% decrease.