How chappies bubble gum can help you understand inflation

Asset manager urges young South Africans to become investment-savvy
Image: Reuters

Anyone who turns on the news occasionally will know that the word ‘inflation’ crops up quite frequently. But what does it actually mean and why should we be bothered about what’s gone up and what’s come down?

Generally speaking, inflation refers to a sustained increase in the price level of goods and services, resulting in a single unit of currency being worth less today than it was a year ago. Inflation as a figure is quoted in percent, so if someone says “inflation is expected to be at 5%”, what that actually means is that something that cost you R1.00 today, is expected to cost you R1.05 next year.

For millennials – sometimes said to be the most nostalgic generation – an example of inflation that gets their attention is the price increases of their childhood favourite bubblegum, Chappies.

The iconic multi-coloured South African sweets with the “Did You Know” facts printed on the inside of each wrapper have been around for over 70 years, and were sold at just 1c each when they were created in the late 1940s.

Nowadays, a single square of Chappies costs around 50c – that’s 50 times more than it was originally, which means the inflation rate for Chappies over the past 70 years has been a whopping 5000%! Of course, the price of Chappies did not surge from 1c to 50c overnight, but inflation each year gradually brought it up to where it is today.

So in other words, while R1.00 could have bought 100 Chappies back in the early 1940s, the same R1.00 can only buy two squares of Chappies today, showing how the Rand has lost purchasing power over time due to inflation. Time moves on and inflation is something we just have to get used to.

If we step back from the Chappies example and think about the economy as a whole, you might be wondering how the government measures inflation overall? The government measures the overall change in prices of ALL goods by using something called the “Consumer Prices Index”.

How does the government measure inflation using the Consumer Prices Index (CPI)?

In the same way that people observe the changes in Chappies prices by comparing one year with another, the government could do the same with all goods and services and use the average as the economy’s inflation figure.

In reality, they do not use this method for two very good reasons:

  1. It would take forever.
  2. Using ALL the goods and services and averaging them would make the measure irrelevant, because no single household buys every good or service available to them in an economy – it would be unrepresentative!

Instead various other measures have been constructed in an effort to give a more useful measure for inflation.

The Consumer Prices Index is based on something called a “representative basket of goods” (think of it as a really big imaginary shopping basket).

This basket of goods holds a collection of the most commonly-bought items by households each year – roughly 700 goods and services. Importantly the basket is not fixed. Instead, the basket changes slightly each year to take into account changes in what we are buying.

Bread, milk and train fares are some of the items included. Each are weighted to reflect their varying importance in a typical household budget.

Finally, in order to work out the inflation level, the change in the total price of this “representative basket” from one year to the next is calculated and this change gives us our inflation figure. Mind you, the baskets of the various households in South Africa can and do vary from this typical basket and so the actual inflation a single household experiences will likely vary from the official Consumer Price Index measure and from other households. The principle still remains though.

I know price rises sound worrying but inflation is not a bad thing.

Inflation is necessary to sustain a stable, growing economy. Businesses, for instance, can’t maintain and grow profits without increasing prices. Equally though, if prices rise too quickly, consumers may no longer be able to afford to spend and there may need to be sharp interest rate rises to bring inflation back under control. This can then choke off economic activity. So the government sees anything between 3% – 6% target as a healthy, balanced level.’

Why does inflation matter?

The predicted level of inflation helps give us an idea of how our economy is doing (economists use it as a thermometer to check an economy’s temperature), and also lets us know what price changes we can expect to see – normally a small increase.

As spenders it is also key for us to remember that inflation is closely linked to our income. If a Chappies is going to cost us 4.5% more in 2020 than it does today, but our income also increases by 4.5%, then next year the Chappies won’t actually cost us any more than it did today.

Inflation alone is not the be all and end all. It is also important to think about how inflation changes in line with your personal income. This will help you understand the effect it will have on your spending power and (importantly!) how many Chappies you can buy.

The eroding power of inflation on cash is one of the most compelling reasons we believe you should seriously consider investing in assets that have the potential to return more than the rate of inflation.

The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested.

By Kondi Nkosi, South Africa Country head at global asset manager, Schroders.

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Let us correct the record. Chappies used to sell 2 for 1c when I was a kid. It was the pink Wicks buublegum that was 1c.

What I find astounding is that the author of this piece has swallowed the koolaid (along with the gum no doubt) that inflation is necessary for a growing economy. This is an outrageous falsehood. Let me translate: if the population is robbed piecemeal (say 3 per cent per annum) of the value of the their savings, they will not notice the ongoing larceny. This is okay as long as the robbery is “managed” and “targeted”. It is NOT okay that regimes cheat us out of the value of our money that they legislate we use. Central banks were cocky with their currency of irredeemable debt. They had almost superhuman powers. Then it all unravelled in the GFC. The same issues still plague us today. In fact, the USA would love some inflation. The more they monetise debt, the more the money finds its way back into the bond market creating more deflation.

The myth of necessary inflation has been sold by those who benefit i.e. get to spent the new money at the old money values. Those close to fiat money creation.

No, inflation is not necessary at all. Under a gold standard you have an ultimate extinguisher of debt and a currency which preserves its value. You also have a control on interest rates.

As usual the real information is found in the comments. I always struggled to understand inflation because it is fundamentally at odds with a free market system. In a free market, if somebody keeps raising their prices, they will fold as consumers buy elsewhere. The author of the article doesn’t really seem to understand this. What inflation is, is exactly as described in these comments: it is an expansion of the money supply by government and a stealth tax of savings.

Inflation is the result of a steady rise in the money-supply. The Reserve Bank, in cooperation with the fractional reserve banking system, determines the growth rate of the money-supply. Therefore, the Reserve Bank determines the rate of inflation.

Inflation is a stealth tax. Very few people can beat inflation after income-tax, dividend tax, capital gains tax and estate duties. The combination of inflation and taxes is a most destructive infringement of property rights. A higher rate of inflation and high tax brackets are charateristics of the socialist government.

Any tax on capital destroys capital formation. A lack of capital formation creates an unproductive workforce and leads to unemployment.

Therefore, the combination of taxes and inflation creates unemployment. South Africa has the highest unemployment in the world, because we are the most socialist country on earth, that is not in hyperinflation yet.

Good comment. Not unexpected. One should note that that the quantity theory of money (QTM) is fatally flawed. Friedman said that inflation is always and everywhere a monetary phenomenon. Be that what it may, a central bank cannot command where the new money flows. The relationship between money supply money and commodity prices is non linear and largely governed by bond speculation.

correct and once we hit hyperinflation then the purchasing power is completely eroded. Worst case scenario, we borrowed money from the IMF 2 days ago, austerity measures kick in, money supply and demand system get limited or restricted/limits on access to funds to become a daily thing. Imagine deposits get taken out of accounts and money gets moved offshore, the state cannot bail out banks because there is no money, then your entire banking system collapses because banks rely on deposits because that is how they create money from nothing. Our debt to GDP ratio will hit 80% this financial year, our GDP is said to contract anything between 7-15% in 2020 alone. Coupled to high taxes, high inflation and also possibly high-interest rates, every cent raised in taxes will go to the money lenders. SARB governed had to relax interest rates, the only reserve bank in the world to cut rates by close to 300 percentage basis points. Other central banks could not cut aggressively because they already had low-interest rates. That was the good thing to inject liquidity and pressure off the overstretched consumer. on the demand side, that was good. the supply side is where the government has destroyed the discuss completely. Personally, inflation is not good because if we want every citizen to benefit equally and add value to our local money system then we need everyone to afford basic goods and services which cannot be at this moment in time. A country is only happy when everyone is happy.

So our money erodes.

A useful article would provide a prescription and a hedge.

With todays technology, why do you say to measure the price increase of everything would take forever. Supermarkets can give the price of every article in their store in a minute. Time to at least increase the “basket of goods” perhaps?

Chappies were 2 for 1 cent in the 1960s. Wicks was 1 for 1 cent then.

Facts are questionable categorically recall arriving in SA as 9 year old in 1974 and still buying the same chappie for the same 0.5c each. So, there was almost zero inflation from late 1940s to mid 1970s !?
Here is a better example medical aid costs from Discovery, months after launching 1992 a full comprehensive package cost me ± R550/month today same package R6,000 (exact R5,954) a full zero in 28 years ! without exact numbers as well, that’s close to 50% higher than the historical inflation.
History we can’t do nothing about, let’s go forward. In another 20 years when personal MA will be at max risk and required (current age 55) my reason preventing current early retirement is the potential R35,000/month required for Discovery Medical Aid.

Actually, Discovery is the same as Chappies:

The average inflation rate for Discovery over the 28 year period is 9.2% per year.

And it rapidly evolved into an admin gorilla with a call centre to avoid.

I also remember the ’70’s when chappies cost 0.5 c a piece.

What also needs to be taken into account, is that SA only adopted the R/c money format after 31 May 1961. Before that, SA was using Pounds, Shillings and Pence.

Another point is, back in those years, the gold standard still existed, where a country’s currency was linked to the amount of gold in reserve. Therefore, money printing (i.a. source of inflation) was not as regular as nowadays.

Actually, the average inflation rate for Chappies over the 70 year period is 9.425% per year.

Chill People. This article is an advertisement. The winner is always the financial advisor and the financial institutions. Then the investor gets what is left if he is lucky.

Ah, Chappies. How we got an education pre-Google 🙂

What happens to the money the reserve bank creates out of thin air? Does it go to government for social security grants? Does this mean the lost value of our savings from inflation comes out somewhere else … to the poor … where money comes for nothing? This ABOVE taxes. Can this be quantified. i.e. in a year how much value from ones capital is lost to this fraud. SA Taxpayers are already probably the most heavily taxed in the world. This does not touch on the ethic of using authority to conjure money when mortal men have to spend their lives adding value to the system in order to build their financial wealth. The inequality that results from the system (of being close to the money) is something that is also perturbing. Lets face it: Central banks are vehicles for socialist control and misappropriation of humanity’s wealth.

Inflation was almost zero then, In 1963 Chappies was 2 for a cent and Wicks 1 for a cent. So in the 70’s it was the same price. I moved on from bubble gum in the 70’s to Texan and Castle.

Economics 101:
Goods & services in country = 1 Loaf Bread;
Currency in Circulation = R10;
Therefore, 1 Loaf Bread = R10.

Now, Reserve Bank prints another R10:
Therefore:
Goods & services in country = 1 Loaf Bread;
Currency in Circulation = R20;
Therefore, 1 Loaf Bread = R20.

The question is, who in the hell received the R10 the Reserve Bank printed?

Let me tell you, my friend, how this all works:

The Reserve Bank & Banks can create infinite quantities of currency.
This currency needs to get into circulation in order to be added to “money” supply (currency is NOT money as it is NOT a store of value).

To get the currency into circulation, the Reserve Bank will exchange the the newly printed currency for government backed assets (treasury bonds and the like). Now know this, government backed means it is guaranteed by future tax payer money…yes, we as taxpayers have to PAY BACK THE MONEY!

The Reserve Bank will also buy low yielding Bonds from Banks and Big Corp. Banks and Big Corp will use this newly created currency to acquire assets (stocks, property, gold and the like).

So the newly printed currency is now converted to assets which is held by the rich & elite (shareholders in Banks & Big Corp).

The man in the street got ZERO of the newly created currency. Not only does the man in the street have to pay back this currency in the form of increased taxes over time, the man in the street has to suffer at the hands of INFLATION resulting from the creation of currency by the Reserve Bank.

And this, my friend, is how you and I are being robbed blind by the system and don’t even know it!

Did you know that SARB printed R500bn into existence during this crisis? Did you get any of it?

The only way to beat this system is to step out of the system. Exchange your spare currency for REAL money like gold, silver, crypto, property etc.
Put all your assets in trusts and learn how to pay ZERO INCOME TAX with trusts.

Now you don’t have to worry about the economy, the Rand, what the politicians do, what the tax rates are etc. In fact, the more they stuff up SA’s economy, the more MONEY you will make.

This explains why the reserve bank bought SA bonds not so long ago because those bonds were government back guarantees. Essentially once the economy does not grow and inflation continues to rise so will the borrowing costs for these bonds rise too.

Something else to be cognisant of when reading the published CPI, is that by design it is misleading.

Hedonic indexing – ensures the ‘basket’ of goods measured is forever changing. Governments practice this all over the world, to defraud bond holders, especially the fallacy of inflation linked bonds and pensioners.

So effectively if the price of a service or a product rises too fast in their basket, they without consultation or authorisation, substitute that product or service with something that has not risen so fast, or has declined. Simplified, the justification being that if the price of beef rises and chicken drops, the public will switch to chicken. If a certain service rises, the public switches to another provider with lower or declining prices. Needless to say this does not even work in one suburb or town, let alone across a whole country and is no reflection of reality at all.

You can take your own basket of real world items from chappies to cars. Apply the published annual CPI over 20 years and see if that comes within even a country mile of todays price – no chance todays prices are multiples higher. The longer the time period the more horrific the disparity.

Essentially they keep CPI as low as possible, certainly far below reality. That is why no one is ever able survive on a state pension when they retire. Or an investor in government bonds is better off keeping his money and buying assets that reflect the real inflation.

Now add ever increasing taxes to a fake CPI and chuck in accelerating devaluation of the currency. All brought to you by an extreme left wing socialist government and you will understand that why in 20 years or maybe much less all state pensions will be worthless.

The R7 trillion today is equal to $416 billion. I fear that like Zimbabwe the R7 trillion today will not buy 100 chappies in 20 years! A sobering thought.

End of comments.

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