Navigating Financial Strain in South Africa: The Inflation-Fueled Erosion of Middle-Class Purchasing Power Since 2016

In South Africa, middle-income employees, earning the average take-home pay, have experienced a significant decline of over R10,000 since 2016, owing to the combined impact of inflation and stagnant salaries.

Despite the lack of an official definition for the middle class, various researchers and economists offer differing determinations due to the considerable wealth gap.

The Bureau for Economic Research (BER), in its latest consumer confidence report, categorizes households with earnings between R5,000 and R20,000 per month as middle-income, while those with monthly earnings above R20,000 are considered high-income.

According to Eighty20’s Credit Stress Report, middle-class workers are defined as those with a household income of nearly R25,000 a month and a personal income of R15,000, aligning with BankservAfrica’s Take-Home Pay Index (BTPI). As of September 2023, the average take-home pay is approximately R15,673 per month in South Africa, reflecting a challenging scenario for this segment.

The latest BankservAfrica BTPI indicates a 4.1% year-on-year increase in average nominal salaries in September. However, due to inflation outpacing this growth, real take-home pay experienced a 0.8% decline to R14,239 over the same period.

Annabel Bishop, Investec Chief Economist, highlights a continued decline in households’ purchasing power, citing a drop from R15,450 in January 2022 to R15,771 in February 2022.

DebtBusters’ Debt Index for the third quarter of 2023 reveals a concerning trend: consumers feel they are taking home 40% less in real terms compared to 2016. Although nominal incomes have increased by 1% since 2016, the cumulative inflation growth of 41% over the seven-year period has led to a 40% decrease in purchasing power.


Navigating Financial Challenges in South Africa: A Closer Look at Income Erosion and Emerging Risks

Middle-income South Africans, earning R15,673 per month, would need to make around R26,122 today to maintain the purchasing power they had in 2016. This translates to a monthly loss of R10,449.

The rise in prime lending rates, increasing from 3.50% to 8.25% since November 2021, has negatively impacted consumer spending. Although not historically unusual, the 4.75% jump poses an additional challenge for new borrowers entering the cycle, warns Bishop.

The latest Consumer Financial Vulnerability Index (CFVI) by Momentum and Unisa highlights that while cyclical factors like high interest rates and inflation continue to threaten consumer finances, two structural risks – load shedding and political instability and corruption – are now significant concerns.

As we move into Q4 2023, structural risks are anticipated to take center stage, overshadowing the impact of cyclical factors. “Persistent unemployment, poverty, inequality, and ongoing load shedding are expected to pose the greatest risks to consumer finances in Q4 2023,” reports Momentum and Unisa.