A friend of mine asked me recently if money market funds make sense as an inflation hedge, especially when you consider that interest is subject to income tax, etc. Now I will write that post – but before I do, I want to write about this issue of ‘layman’ inflation. Because whenever I hear people talking about hedging themselves against inflation, my next question (not always verbalised) is “Which inflation?”
The trouble is: the inflation that gets talked about during those half-time breaks in rugby season is not a real number – it is an average of estimates. And there are lots of estimates.
At 10am this morning, StatsSA will release the Consumer Price Index (CPI) report for July. That is, we’ll get the inflation numbers.
But what we normally focus on is a very specific type of inflation: headline inflation. So in the June CPI report, it was the very first line of the Key Findings:
Annual consumer price inflation was 6,3% in June 2016, up from 6,1% in May 2016.
As we well know from our daily lives, life in Cape Town is significantly more expensive than life in Bloemfontein. Just like restaurants in Sandton are significantly more expensive than restaurants in Boksburg.
So if you read the report, you’ll discover that the inflation rate that influences your daily life is influenced by a number of things (and I’m going to rely on the numbers from June’s report):
First up, Geography
If you live in an urban area, your average inflation for the past 12 months was about 6.3%. But if you lived in a rural area, sorry for you, but your average inflation (based on a rural spending pattern) was closer to 7.9%.
And there are other differences as well, based on your province. Gauteng and the Western Cape had inflation rates of around 6.3% – while the Eastern Cape had an inflation rate of 7.6%.
But that’s still very general.
Next up, You Are What You Eat
When you start breaking down the shopping basket, some notes:
- Vegetables have increased in price by 18.4% over the last year (Fruit is up by 14%).
- Oils and fats have increased in price by 19%.
- Breads and cereals? Up by 14.8%.
- Hot beverages – up by 15.9%.
- But meat is being kinder to your wallet – it’s only up by 5.9%.
- And if you’re a spirits drinker, good news: those are only up by 4.5%.
But generally speaking, your grocery shop cost is galloping ahead of normal inflation – because when you put that all into an average consumer basket, food inflation is up at around 10.8%. And if you’re a particularly healthy eater, you’re doing a lot worse.
Of course, some of that has to do with the drought, and a weak Rand driving up the cost of imports. But still – these aren’t anecdotes, those are official figures in the statistical release.
Good news for renters: rental inflation year-on-year is about 5.3%. That’s less good for landlords, although that’s offset by the fact that the cost of maintenance has stagnated (it’s actually down by about half a percent, which is roughly a rounding error).
But electricity costs are up by 11.3%, and water costs are up by 9.8%. So if you’re the kind of person that likes to have a lot of lights on, with the indoor heating and long luxurious baths, you’ll be topping out there.
That inflation situation can be broken down further, but I guess the main point is this: if you’re the kind of person that can have a conversation about inflation-hedging yourself using a money market fund, then you’re sitting in a category of consumer that has a very different consumption basket to the average consumer. And your particular inflation rate is going to be much higher than headline inflation – because things like your food bill will have more high-inflation items sitting in it.
So it’s not so surprising that the upper and middle classes are finding themselves more constrained, because those ‘inflationary’ increases in salary (if at all) are not enough to cover the actual increases in their particular costs of living.
And going back to the money market fund, my question would be: is it especially meaningful to hedge yourself against an inflation rate that doesn’t apply to you?
I mean, it’s definitely better than not hedging yourself at all.
So at least there’s that.
Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.