Rising prices and interest rates are relatively mild by historical standards, so why are we feeling so stressed? A lack of economic growth is why.

While rising prices and interest rates may be draining our pockets, for middle- to upper-income earners, things are not as bad as they have been in times past. We have lived through far tougher times.

In the late 1990s the prime interest rate reached 25%, causing a mortgage crisis and mass repossessions of homes as people were unable to meet their bond repayments.

In the 1970s the world lived through unprecedented fuel price shocks due to the energy crisis and inflation raged out of control for decades.

Even our current food price inflation, which was recorded at 6.3% in April 2021, is moderate compared to the drought of 2017 where food staples were increasing at a rate of 45% and the overall rate of food inflation soared to over 12%.

We are certainly not expecting the kind of interest rate increases we saw in 1998 when rates went up 640 basis points in just three months, or even 2001/02 when the repo rate increased by 350 basis points, bringing the prime rate to 17%.

Inflation and interest rates are still low

In comparison, the current interest rate cycle is expected to be relatively moderate. Rates are only increasing by 25 to 50 basis points at a time. Over the entire period of rising interest rates, which started in November 2021, interest rates are expected to only increase by around 250 basis points in total, reaching a repo rate of 5.5%. That is still among the lowest interest rates in our history, and lower than pre-COVID levels.

As Stanlib economist Kevin Lings explains, the current inflation rate is nowhere near reaching the double-digit inflation rates that South Africa became accustomed to in previous decades.

“We used to live with double digit inflation and volatile interest rates. Incomes did not keep up with inflation which increased at 15% a year. Living standard went backwards in real terms,” explains Lings.

But with the rapid decrease in inflation post 2003, many households saw real incomes rise, and there was to some extent a wealth effect.

Since the end of the credit crisis in 2009, we have become used to an environment of declining inflation and interest rates. This is why, in part, we are experiencing stress around current events. We are simply not used to it.

Lings explains that the more moderate price and interest rate environment is partly due to the inflation targeting practice of the Reserve Bank which has kept inflation largely under control.

It has also been helped by a relatively stable rand, unlike the 1998 emerging market crisis and the 2001 currency crisis which saw the rand weaken significantly, resulting in major interest rate hikes to protect the currency and contain imported inflation.

“The benefit of inflation targeting has meant that prices have anchored at lower levels. We are also able to attract better capital flows which helps to stabilize the currency, so the Reserve Bank has not had to act as aggressively on interest rates as in the past. There is also an awareness that in fighting inflation, you don’t want to wreck economic activity,” explains Lings.

Even our household debt levels have improved in the last few years, as banks have pulled back on lending in recent years. For example, extension in credit card debt has been growing below inflation.

This is why banks are not worried about customers meeting their debt servicing costs, even if some individual households may be overindebted.

Economic growth is nowhere to be seen

If the statistics are telling us that things are not that bad, why then are we feeling so much financial stress? That is because our economy is in trouble. In big trouble.

The main reason inflation is under control is because our economy is not growing. There is no demand pressure to keep prices inflated and companies are not making enough profits to meet wage demand increases.

Salaries are not keeping up with inflation and credit demand is low because people have stopped spending. When inflation is being kept under control due to a lack of economic growth, this is bad news for households.

One statistic that is markedly different from those previous high inflation/interest rate environments, is our unemployment level which is the highest in our history. We have still not recovered 1.5 million jobs lost at the start of the COVID lockdown.

While the impact of rising fuel and food prices can largely be absorbed by middle- to upper-income earners, the impact on low-income earners and the unemployed is devastating.

Lings says the lowest 40% of income earners spend nearly half of their income on transport and food. Inflation on public transport in April was 14%, so the inflation rate experienced by lower-income earners is higher than the middle to upper class when their main purchases experience significant price increases.

Yet the knock-on effect of unemployment is being also felt by middle-income earners. They are responsible for supporting extended family who have lost their jobs and the increasing number of young people who are unable to find work.

Joblessness is why we should be worried about the future. Prices will moderate. Over the next year we could even see fuel prices coming down, and we expect interest rates to start to decline in 2023.

But without economic growth and the job creation that comes along with it, the pressures on households will only continue to grow. We should be less worried about fuel and food prices, and a lot more worried about how we are going to create jobs and grow the economy.

This article first appeared in City Press.