Plenty of airtime lately has been dedicated to the rising cost of living. Everyday items like petrol, vegetables, and other groceries have been increasing in price since the same time last year.
Inflation refers to the rate of increase in prices over a time period, like comparing the cost of a bag of carrots from one year to the next. Some inflation is a good thing for the economy, but if too much happens too quickly then your money suddenly doesn’t buy nearly as much as it used to.
The Consumer Price Index (CPI), meanwhile, measures the average person’s cost of living. In New Zealand, the CPI rose to 5.9% in 2021 and looks set to rise even higher in the coming months.
High inflation can be very detrimental for low-wage earners, but also materially impacts people that rely on interest earned from investments, like a term deposit. High inflation can mean you’re losing money as the purchasing power of your money drops faster than the interest you are gaining.
What’s making inflation go up?
High inflation can be caused by a lot of different factors including relaxed monetary policy. If the supply of money in an economy grows bigger than the economy itself, the value of that money falls.
The global response to the pandemic has seen a huge injection into the money supply. However, COVID-19 has caused worldwide issues in factories and shipping, disrupting production and supply chains.
The final piece of the current inflation puzzle is the Russian attacks on Ukraine which has caused an energy shock, forcing up the price of oil and gas and to a lesser extent wheat.
Coping with high inflation periods
Economists agree that low, stable, and predictable inflation is best for the economy as it is easier to factor into price adjustments and interest rates, making it less impactful over time.
When inflation is low and steady, it’s easy to control your spending and adjust your investment habits to suit.
High inflation makes that a little trickier.
Diversifying your investments is one big way to help mitigate the problems associated with high inflation periods. Growth assets offer the best chance for your investments to keep pace with inflation and to maintain the value of your money over time. A diversified portfolio that includes growth assets allow you to focus on medium to long-term growth of your portfolio and are less likely to be affected by current world financial conditions.
AdviceFirst can help you to develop an investment strategy that takes inflation into account.
To contact an AdviceFirst adviser, just call 0800 438 238, or email letstalk@advicefirst.co.nz
