Inflation
Learn what inflation is, how it's measured in South Africa, and practical ways to protect your small business.
February 2024 | Published by Xero
Published Wednesday 12 August 2026
Table of contents
Key takeaways
- Inflation is the rate at which prices rise over time, reducing what your money can buy if your income does not keep pace.
- Statistics South Africa measures inflation using the consumer price index (CPI), and the South African Reserve Bank targets inflation of 3% with a tolerance band of one percentage point either side.
- Rising costs, higher interest rates and cautious customer spending are the main ways inflation affects small businesses.
- You can protect your business by reviewing overheads, adjusting prices strategically, monitoring profit margins and staying on top of cash flow.
What is inflation?
Inflation is the rate at which the prices of goods and services rise over time, measured by tracking changes in average prices. As prices rise, each rand buys less than it did before, meaning your purchasing power falls.
Some inflation is normal in a healthy, growing economy. However, when inflation rises too fast, it creates real challenges for small businesses trying to manage costs and maintain profits.
What causes inflation?
Several factors can push prices higher across an economy. The two main types of inflation are demand-pull and cost-push.
Demand-pull inflation happens when consumers and businesses want to buy more goods and services than the economy can supply. Cost-push inflation occurs when the cost of producing goods rises (for example, higher fuel prices or increased wages) and businesses pass those costs on to customers. A growing money supply can also contribute to rising prices over time.
The most common causes of inflation include:
- consumer demand outpacing the supply of goods and services
- rising input costs such as fuel, raw materials and wages
- increases in the money supply
- supply chain disruptions that limit the availability of goods
What is the inflation rate and how is it measured?
The inflation rate is the percentage by which prices rise over a specific period, usually a year. It tells you how much more expensive a typical set of goods and services has become compared to the previous period.
In South Africa, inflation is tracked using a consumer price index (CPI). Statistics South Africa (Stats SA) compiles the CPI by monitoring the prices of a representative basket of goods and services that households typically buy. Changes in the total cost of this basket show how prices are moving across the economy.
The inflation rate is calculated as follows: inflation rate = (new price − old price) ÷ old price × 100. For example, if a basket of goods cost R100 a year ago and now costs R105, the inflation rate is 5%.
According to Statistics South Africa, annual consumer inflation was 5.0% in June 2026, its highest level in two years.
Inflation, deflation and hyperinflation
Understanding related terms helps you see where inflation sits on the spectrum of price changes. Deflation is a general fall in prices, often linked to weak demand or economic contraction. Disinflation means inflation is slowing but still positive (prices still rise, just more slowly).
Hyperinflation is extreme and rapid inflation, where prices spiral out of control. This erodes the value of money so quickly that everyday transactions become difficult. Hyperinflation is rare but devastating when it occurs.
- Deflation: a sustained decrease in the general price level
- Disinflation: a slowdown in the rate of inflation
- Hyperinflation: extremely rapid, out-of-control inflation
How does the Reserve Bank control inflation?
The South African Reserve Bank (SARB) uses interest rates as its main tool for keeping inflation low and stable. When inflation rises, the SARB may increase interest rates. Higher rates make borrowing more expensive, which tends to reduce spending and cool price increases.
The SARB's inflation target is 3%, with a tolerance band of one percentage point either side (meaning an acceptable range of 2–4%). This point target replaced the previous 3–6% target range in 2025. By keeping inflation within this band, the Reserve Bank aims to support stable economic growth and protect the value of your money.
Why inflation matters to small businesses
Inflation affects almost every part of running a business, from the cost of stock to what customers are willing to pay. Understanding these effects helps you plan ahead and protect your margins.
Inflation can occasionally benefit your business. It raises the cash value of assets like property or inventory. It also erodes the real value of existing debt, so you repay loans with money that is worth less than when you borrowed it.
However, inflation usually creates challenges for small businesses:
- passing rising costs on to customers is difficult when they are already feeling the pinch
- customers tend to cut discretionary spending when prices climb
- borrowing costs rise as the Reserve Bank lifts interest rates to curb inflation
- planning and budgeting become harder when costs are unpredictable
How small businesses can deal with inflation
The good news is you can take practical steps to minimise the impact of rising prices on your business. A proactive approach keeps you in control and helps you recession-proof your business if conditions worsen.
Consider these actions:
- Review your spending and look for ways to trim overhead costs without affecting quality.
- Evaluate your pricing and consider increasing prices gradually to keep pace with your own rising costs.
- Keep a close eye on your profit margins to catch problems early.
- Stay on top of managing your cash flow so you can cover expenses even when payment timelines stretch.
- Negotiate better terms with suppliers or explore alternative vendors.
- Focus on efficiency and reduce waste wherever possible.
Stay ahead of rising costs with Xero
When prices are rising, real-time visibility into your finances is more important than ever. Xero helps you track your margins, monitor cash flow and spot cost increases as they happen, so you can respond quickly.
With clear financial insights at your fingertips, you can make confident decisions and keep your business on track. Try Xero today and get one month free.
FAQs on inflation
Here are answers to common questions about inflation and its impact on South African businesses.
What is a good inflation rate for South Africa?
The South African Reserve Bank targets an inflation rate of 3%, with a tolerance band of one percentage point either side (2–4%). Inflation within this range is considered healthy for economic stability and growth.
What is the difference between inflation and deflation?
Inflation is a rise in the general price level, reducing buying power over time. Deflation is the opposite: a sustained drop in prices, which can signal weak demand and economic trouble.
How does inflation affect small businesses?
Inflation raises the cost of supplies, wages and borrowing, squeezing profit margins. Customers may also spend less on non-essentials, making it harder to maintain sales volumes.
Who measures inflation in South Africa?
Statistics South Africa (Stats SA) measures and publishes inflation data. Stats SA compiles the consumer price index (CPI) each month to track how prices change for a typical basket of goods and services.
Related terms
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Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.