The word ‘inflation’ doesn’t only dominate business news headlines, but finds its way into our everyday conversations also.
So, what is inflation and how does it affect you?
In simple terms, inflation signifies a rise in the price of goods and services, meaning you pay more for every purchase you make.
𝐇𝐨𝐰 𝐚𝐫𝐞 𝐰𝐞 𝐢𝐧 𝐀𝐮𝐬𝐭𝐫𝐚𝐥𝐢𝐚 𝐢𝐧𝐟𝐥𝐮𝐞𝐧𝐜𝐞𝐝 𝐛𝐲 𝐰𝐡𝐚𝐭 𝐡𝐚𝐩𝐩𝐞𝐧𝐬 𝐢𝐧 𝐭𝐡𝐞 𝐔.𝐒?
It is not a surprise that countries in today’s world are more connected than ever before. Therefore, a rise in US inflation rates will impact the Australian economy too, along with other countries.
However, the degree and timing of its impact will vary. For example, a rise in labour costs in the US may have a limited impact on Australians; however, an increase in the price of iPhones or Nike shoes in the US will affect our pricing of these goods here as well.
𝐖𝐡𝐚𝐭 𝐰𝐢𝐥𝐥 𝐛𝐞 𝐭𝐡𝐞 𝐢𝐦𝐩𝐚𝐜𝐭 𝐨𝐟 𝐫𝐢𝐬𝐢𝐧𝐠 𝐔𝐒 𝐢𝐧𝐟𝐥𝐚𝐭𝐢𝐨𝐧 𝐨𝐧 𝐀𝐮𝐬𝐭𝐫𝐚𝐥𝐢𝐚’𝐬 𝐞𝐜𝐨𝐧𝐨𝐦𝐲?
In recent times, many developed economies, including the US and Australia, have 𝐫𝐞𝐝𝐮𝐜𝐞𝐝 𝐢𝐧𝐭𝐞𝐫𝐞𝐬𝐭𝐫𝐚𝐭𝐞𝐬 to boost their economies. With rates nearing all-time lows, there is an expectation that rates will increase due to the strong performance of those economies. Quite often when the U.S increases its interest rate, Australia is quick to follow suit.
The cost of borrowing funds (home loans, business loans, personal loans, etc) will increase, leading to a rise in the inflation rate, making goods and services more expensive. Rising inflation rates can also negatively impact the Australian dollar, where one AUD buys less USD than it may have done previously.
This also affects tourists who may have to convert money before traveling, and can negatively affect an individual’s capacity to save money, especially if their incomes do not rise by the same rate as inflation.
𝐖𝐡𝐚𝐭 𝐰𝐢𝐥𝐥 𝐭𝐡𝐞 𝐞𝐟𝐟𝐞𝐜𝐭 𝐛𝐞 𝐟𝐨𝐫 𝐢𝐧𝐯𝐞𝐬𝐭𝐨𝐫𝐬?
A rise in inflation affects investment markets 𝐧𝐞𝐠𝐚𝐭𝐢𝐯𝐞𝐥𝐲due to higher interest rates, volatility in the economy, and uncertain share prices.
For mum and dad investors, rising interest rates mean paying more interest on their home loans, which reduces their disposable income and, in turn, reduces their capacity to invest. Growth in share prices can be volatile, meaning it will take them longer to build wealth.
For retirees, an increase in the price of goods and services at a time of share market volatility can lead to having to sell more of their investment assets (potentially at a loss or reduced profit). Also, there could be uncertainty in dividend income, which many retirees often rely upon. Retiree investors will have fewer years to recover from a drop in their portfolios compared to younger investors.
𝐇𝐨𝐰 𝐬𝐡𝐨𝐮𝐥𝐝 𝐲𝐨𝐮 𝐩𝐫𝐞𝐩𝐚𝐫𝐞 𝐟𝐨𝐫 𝐚 𝐫𝐢𝐬𝐞 𝐢𝐧 𝐢𝐧𝐟𝐥𝐚𝐭𝐢𝐨𝐧?
✅ It is important to first analyse your personal cash flow situation to understand where your money goes.
✅ Reconsider new personal loans, such as car loans. Do you need to take on new debt when interest rates are likely to increase?
✅ For the risk-taking investor, it can be tempting to invest more money into shares when prices are falling, but remember that this is a long-term investment so the money should be left invested to benefit from the recovery.
✅ For investment purposes, consider having exposure to well-established companies’ “blue-chip stocks” vs riskier stocks. Investors often find comfort knowing their funds are exposed to good quality companies with strong balance sheets, which are well managed.
If the thought of rising inflation leaves you feeling unsettled, be sure to talk to a professional adviser. Your adviser will review your financial position, and your ability to meet your financial obligations, as well as identify strategies to outpace inflation.