By Josef Kefas Sheehama
In August 2022, Namibia’s annual inflation rate climbed by 7.30%. Although the drop in fuel costs is notable, it does not solve the larger issue of inflation.
Technically, you have to pay more money to purchase the same items when there is inflation. Inflation will have an effect on almost everything in our life, including food, housing, household goods, clothing, transportation, health care, leisure activities, and alcohol. We might need to adapt to a different lifestyle than we are accustomed to if costs rise faster than earnings do. The most adverse effects will be felt by those on fixed incomes. Salaries are a key factor in motivating workers to demonstrate and use their unobservable skills when carrying out various tasks or jobs. Taxes are fees that a nation’s government collects from its citizens and uses for the benefit of the populace as a whole. While the reduction in income tax increases disposable income, it also reduces government spending and the other way around. Tax revenue is a crucial source of funding for the government, but it also significantly affects workers’ earnings and net wages. The types, nature, and rates of taxes determine how much they have an impact on an employee’s wage or salary.
Since a larger portion of their income is spent on food, the poor are more negatively impacted by inflation than the wealthy. The employee tax will be considered if the profits follow the larger earnings base, and the employee will pay less income tax if the earnings follow the lower earnings base. Additionally, taxes are divided between the business and the employees. The increase in taxes will cause fewer people to work because the employer contributes to employee taxes as well, which will put more pressure on those who remain to work hard and efficiently. In many cases, the business is unable to decrease employee pay due to increased tax rates. To make things clearer and make them understandable to the average person, I’ll utilize real-world examples. Your mortgage balance won’t change due to inflation, but your interest payments might. Whether you have a fixed-rate or variable-rate mortgage will determine everything. You’re good until you need to renew if you have a fixed-rate mortgage. However, if you have a mortgage with a variable rate, you might notice that rates start to increase sooner rather than later. Any modifications will be addressed by the Bank of Namibia. I am confident that the Bank of Namibia’s Monetary Policy Committee will raise the repurchase rate by 0.75 basis points, to 6.25% from 5.50%, on October 26, 2022. By the end of 2022, I thought the MPC would increase interest rates by an additional 0.50% bps. In addition, I predict that inflation will probably reach a peak in October at roughly 8.00% before beginning to gradually decline until the end of 2022.
Furthermore, the income of a fixed-salary person falls with the rise in prices of goods and services. Real income raises the standard of living, not the nominal income. Inflation affects real salaries, which has a direct impact on income distribution and the level of poverty. Therefore, it seems possible that the fall in real salaries during high inflation is an equilibrium phenomenon, which means that the real salaries are adjusted to the inflation with time. Inflation is rising, but your salary probably won’t. Food prices are up, rent prices are up, and oil prices are moderate. Yet it’s unlikely that salaries will rise correspondingly. Now it’s clear we’re going to have another year of inflation, and probably several more. However, these rates aren’t based on the cost of living they’re based on existing demand for a role. Employers have reason to be cautious before committing to inflation-based increases. Once they do this, employees will expect them to sustain the same salaries. Employers would rather not be in a situation where they can’t sustain an inflationary salary.
Namibian consumers can beat the current high inflation rate by understanding their inflation baskets and taking control of the unique expenses that are driving up their cost of living. An individual inflation basket represents the core goods and services that an individual usually spends their money on, compared to the official inflation basket, which represents the goods and services that the average Namibian spends their money on. So, everyone’s inflation basket is different, and the composition of your basket is driven by how you spend your money. Consumers must understand where the increases are in their inflation baskets to try and soften the impact inflation has on their standard of living. In Namibia, the poor and vulnerable are hit harder by inflation than consumers in the middle-income group. The lower income group’s inflation basket tends to be heavily skewed towards transport, food and education, and any significant price rise in those elements has a much bigger impact on poor households. Similarly, there is a big difference between the inflation baskets of the middle- and upper-income groups. The goods in their inflation baskets include food, medical costs, rent and some transport.
Namibians must be mindful that there is a difference between good and bad debt. Bad debt typically comprises overspending on goods, services and experiences that are not a necessity to live life. Conversely, a home loan that builds personal and generational wealth represents good debt. If you are going to borrow money, do so prudently. Consider which needs the debt or loan is going to address and if the objective you are borrowing for is going to serve you in future.
In conclusion, know the impact of Income tax rates and an Inflation rate on your income. It is not enough that your gross income is high, what’s Important is that your income is high enough to fulfil your needs and improve your life standard.
Compare your increment with the inflation and income tax rates. Otherwise, you would not be able to know whether your increment will be adding something to your life standard or just enough to offset the rising inflation and taxes.
Expectations of the future can drive behaviour today. The Bank of Namibia is concerned to keep inflation expectations under control to help meet its inflation target.