Protecting finances against inflation

Business Reporter

The Reserve Bank of Zimbabwe (RBZ) last Thursday released the 2021 Mid-Term Monetary Policy Review Statement.

It provided among other things an evaluation of the previous monetary policy statement issued in January 2021.

The Statement discussed developments in the financial services sector as well as balance of payment developments since the beginning of the year.

Also part of the Statement was a section that discussed inflation developments and outlook, that is our focus this week.

According to the central bank inflation, which was previously forecast to close the year at 10 percent, before being revised upwards by the Monetary Policy Committee at its last sitting end of June to 25 percent, is now projected to close the year between 25 and 35 percent.

The RBZ says the deviation from the initial end period forecast of just below 10 percent was due to unavoidable shocks to international food and administered prices such as freight charges.

In detail, the central bank says Zimbabwe will suffer from the pass-through effects of international price increases.

“A pass-through of 20 percent (13 percent in the first year and 7 percent in the second) would, thus, imply an increase in consumer food price inflation of about 3,9 percentage points and 2,1 percentage points on average in 2021 and 2022, respectively for Zimbabwe.

“An additional one percentage point to the 2021 global consumer food inflation could be added by the higher freight rates,” the apex bank explained.

Without labouring much on the how, the fact of the matter is that despite coming off since it peaked at 837 percent in July 2020, inflation remains elevated and remains an enemy to incomes.

Broadly, inflation refers to the overall increase in prices of goods and services. To put it differently, inflation is the decline of purchasing power of a given currency over time.

In simple terms, inflation means one has to spend more to fill their fuel tank, buy a bottle of cooking oil, or a pair of shoes. In other words, it increases the cost of living.

Inflation also reduces the value of the dollar. The dollar today will not have the same value in December because of inflation now forecast to close the year between 25 and 35 percent.

For that reason, it can reduce standards of living and affect financial health over time if not managed well.

Inflation has implications on how we manage our money: savings, investments and has a bearing on our retirement planning.

Although it has significantly slowed down, rising prices remain and need to be factored into personal financial planning.

A powerful way to protect against inflation is to increase one’s earning ability and income.

“If income can increase in line with inflation or ahead of the inflation rate then inflation would be irrelevant.

Another way of dealing with inflation is to hedge against value erosion.

This can be done by looking for opportunities that give a good return. High inflation tends to send share prices higher, which could be good news for stock market investors.

As it stands, the stock market has recorded gains of more than 150 percent against year-to-date inflation of less than 30 percent and slowing.

Whether it will do so in the future is unknown, so there’s a risk.

However, while stocks don’t offer guaranteed returns, in the long run, a diversified basket of stocks with dividends reinvested has the potential to earn more for investors than the inflation rate.

As always, consult with your financial planner before making any financial decision to be sure this fits within your goals.