Inflation stays stable at 8.4%

Statistics SA released the Consumer Price Index or the Inflation figures for April 2009 today May 27th 2009. These figures show that inflation has dropped by 0.1% to 8.4%. Average prices increased by 0.5%. This is not totally unexpected and can be seen as the long tail of inflation targeting that has been pursued by the Reserve Bank. Interest rate cuts have an effect on inflation but this effect takes time to manifest and the MPC will be announcing the new interest rates on Thursday 28th of May 2009. GDP is down and this will spur the government to try to kick start the economy. So what has gotten cheaper or not?

• Food and non-alcoholic drinks increased 0.5%
• Bread and cereal decreased by 0.3%
• Petrol increased by 4.9%

The inflation figures when you pick them apart show that the sectors that are getting more expensive most quickly include the petrol price, increasing by 4.9% and hot beverages at 4.7%. These kinds of sectors don't respond as quickly to rate cuts, as there are more inputs to go through before the effect is felt. The Monetary Policy Committee has already cut interest rates by 350 basis points or 3.5% since December 2008 and these cuts are starting to manifest in the economy now, although it seems that with such a small change that the major effects of inflation targeted rate cuts have reached the end of their usefulness.

In order to deal with the economy at the moment using a budget planner is key. Stubborn sectors such as food and transport are still not in parity with the inflation rate and you should budget more for food than before rather than less as you would expect if prices are going up more slowly. These savings are not being passed onto the consumer and we have all got less spending money than previously. So this means we have to be ultra careful with our money if we are to survive the rest of the year before the expected turnaround sets in.

It's official: We are in a recession

Statistics SA released the quarterly Gross Domestic Product figures today. GDP has dropped by 6.4 percent! GDP is 'a basic measure of an economy's economic performance, [it] is the market value of all final goods and services produced within the borders of a nation in a year'. As such it is an indicator of how the economy is doing and is a very important indication of what the government might do to manage the economy next. This drop means we are in a recession. So what do these figures mean?

• Jobs are less secure
• Home loans less available
• Budget planning is imperative!

There has been some speculation that we are heading into a recession and these figures confirm that we have. Recession is defined as two consecutive quarters of contraction rather than growth. In a growth model based economy, contraction, recession and depression are the voodoo words of economic collapse. A growth based rather than sustainable economy will always be worried by lack of growth as many loans are based on the fact that the economy is expected to continue to grow. So in a growth based economy, and the government has signalled that it wants to follow a developmental model, we can expect the government to react to these figures by trying to boost the economy.

One of the methods that the Government has mandated is the Reserve Bank policy of inflation targeting. This is basically an interest rate strategy and we can expect the MPC (Monetary Policy Committee) to cut rates on Thursday 28th May 2009. The announcement will be broadcast live on SABC 3 from 15:00 to 15:30. The fact is we are in a recession and planning your budget has never been more important. Sound personal finance planning now will see you through the lean times ahead until the cycle turns and a new boom market is created. Of course in a growth model economy we will always have a cycle of boom and bust. So with no real change expected there, protect yourself now to survive the economic waves later.