What is inflation, and how does it erode money?
Inflation is the steady increase in the prices of everyday goods and services over time. As prices rise, a single Rand buys less than it did before.
It does not physically remove money from a bank account, but it silently destroys the purchasing power of that money. If savings do not grow faster than the inflation rate, the saver is mathematically becoming poorer.
The silent thief of purchasing power
When inflation happens, the Rands in a wallet stay exactly the same, but the cost of the things those Rands can buy goes up. This effectively erodes the value of the cash.
If a trolley of groceries cost R1,000 five years ago and now costs R1,300, the money itself has not changed. The prices have inflated, meaning a person now needs significantly more money to maintain the exact same standard of living.
How South Africa manages it
Because high inflation destroys national wealth, the South African Reserve Bank (SARB) actively monitors and manages it.
For around 25 years, South Africa aimed to keep national inflation anywhere between 3% and 6%. In late 2025, the government and SARB officially lowered this target to 3%, with a tolerance band of 2% to 4%.
SARB controls inflation primarily by adjusting interest rates. If inflation rises too far above the 3% target, SARB increases borrowing costs to slow down consumer spending, which cools the economy and stops prices from climbing so quickly.
The mathematical danger of cash
People often leave their long-term savings in a standard transactional bank account because it feels safe from stock market crashes. However, inflation guarantees that cash loses value every single year.
If a bank account pays 1% interest for the year, but the national inflation rate runs at 4%, the money is mathematically going backwards. At the end of the year, the account balance looks slightly higher, but the saver is actually poorer because the cost of living grew four times faster than their money.
Understanding the real return
To know if an investment is actually building wealth, it is measured against inflation using a calculation called the real return.
The real return is the investment's interest rate minus the current inflation rate. If a fixed deposit pays 8% interest and inflation is 4%, the real return is only 4%. That 4% is the true, physical increase in the investor's purchasing power. Building long-term wealth relies on using assets like equities or property that consistently generate a positive real return over decades.
When inflation is actually helpful
While inflation silently damages cash savings, it mathematically benefits people who hold fixed debt.
If a person takes out a personal loan with a fixed monthly repayment of R2,000, that specific Rand amount never changes. As inflation happens over the years, the cost of living rises, and the person's salary generally increases to keep pace with it. Because their salary is larger but the loan repayment stays exactly at R2,000, the debt takes up a progressively smaller percentage of their monthly income, making it easier to pay off over time.
Terms used on this page
- South African Reserve Bank (SARB)
- The central bank of South Africa, responsible for managing the country's money supply and protecting the value of the Rand.
- inflation
- The rate at which the general prices of goods and services in an economy increase over time.
- real return
- Growth after inflation — the increase in what your money can actually buy, not just the number on the statement.
Sources
Reviewed July 2026