Inflation – does it matter?
Depends, with assets of shares/land/buildings and debt it may advantage you, if on fixed income or hold cash it may reduce your living standards and cash reserves.
Inflation is the decline in purchasing power, you get less for your dollar, as prices rise. This measure is based on a basket of goods which make up the Consumer Price Index (CPI) and the Wholesale Price Index (WPI).
There are 3 causes of inflation.
Demand-Pull Inflation. An increase in the supply of money is the root of inflation. Governments around the world increased the supply of money by printing and giving away to individuals to manage the pandemic.
Cost-Push Inflation. This is a result of increasing prices due to rising costs. A few years ago inflation index moved because the banana crop was wiped out, dramatically increasing the price of bananas, as is oil scarcity increasing fuel prices which is pushing the rate up now impacting CPI. Not all prices are rising but a CPI change is used to justify rent, wage and other price increases which eventually flows through.
Built-in Inflation. Expectations that wages/rent/costs will rise feeds into increasing prices which feeds increasing costs, and so on.
Inflation punishes savers and rewards borrowers. Higher inflation encourages speculation, as the higher the inflation demands increasing reward and the greater the risk. Without certainty of supply costs in the future, businesses may misjudge pricing and supply decisions. High and run-away rates of inflation cause a loss of faith in the government and economy and as a consequence people may act irrationally trying to defend themselves from loss.
Central banks have inflation targets and adjust interest rates up or make lending more difficult to reduce inflation growth. The current challenge is the high household debt will be heavily impacted by interest increases, reducing spending and slowing growth in the economy. Higher inflation than targeted may be tolerated.
Uncertainty creates risk but also opportunity, it pays to try to understand how it may affect you.
If you have questions in relation to the above, or any other matters, please do not hesitate to contact our office on 1300 620 345.