The Central West's Favourite Community Newspaper

Nothing to see: Making sense of the inflation spike

If you’ve been watching the financial news over the past week, you will know that Australia’s inflation rates have now peaked to a 13-year high.

What does that mean for retirees, and should we be doing anything to protect the purchasing power of our nest eggs?

We meet again

We haven’t seen systemically high inflation rates in Australia since the 1970s and 1980s, when double digit rates were commonplace.

It’s been a while.  So, what is inflation?

It is the number one long-term risk facing retirees. Inflation is the rise in the price of an item over time.  As inflation increases, purchasing power reduces and we can’t buy as much with our income.

Inflation explains why you could buy a dozen eggs for about 80 cents in the mid 70s, but today you can pay up to $7.

For most of us retirement is long, and inflation is the number one cause of people running out of money in retirement.

But don’t worry yet

The latest inflation numbers from the Australian Bureau of Statistics (ABS) show the annualised inflation rate at 3.8%. That’s above the Reserve Bank of Australia’s (RBA’s) target range of 2 to 3% a year.  Generally when inflation gets above this range, the RBA tries to cool the economy by increasing interest rates.

So, should we expect to see interest rates rising again?

No, that’s unlikely. The high inflation figures were always expected. They reflect more on what was happening 12 months ago than what is happening now.  In response to the first wave of Covid, the government implemented relief measures such as discounted childcare.  These are now being unwound.

In fact, when you take account of the unwinding of the stimulus measures, core inflation is just 1.6% pa.

We are unlikely to see interest rates increase until inflation is consistently being reported within the 2 to 3% range. According to the RBA, that’s unlikely to be until 2024.

Inflation-proof your portfolio

Investing for retirement is complex. We need to balance short-term risks, like share market crashes with long-term risks such as inflation.

One way is to set aside the money you need today and the next few years and park it in cash, term deposits and other secure investments.  But cash and term deposits don’t protect against the long-term risk of inflation. Only growth-style investments, like shares and property, do that. 

So, with your short term needs safely provided for, you are free to invest the rest for the long-term. Sensible exposure to quality growth-style assets protect against inflation and provide a higher return than fixed interest investments over the long run.

If you’d like to learn more about how to inflation-proof your retirement, give us a call.  We’d love to help.

Daniel Crump is the founder of Daniel Crump Financial Planning.  This article is general and does not consider your personal circumstances.  If you would like advice specific to you please visit www.danielcrumpfp.com.au or give us a call on 0418 148 622.

Total
0
Shares
Leave a Reply

Your email address will not be published. Required fields are marked *

Related Posts
Read More

‘The Help’

An intriguing Australian photo from the Edwardian era c1915. A maid at right and the next lady seem amused. The woman second from left seems more dour while the man is anxiously pointing at something. Perhaps he wanted another slice of what seems to be a huge cake. It is not known if the scene ... Read more
Read More

Chiff Blog #2

From our correspondent Garry Reynolds’ online book chapter 15 … “At age 5, Ben had been literally farmed out from his struggling working class Irish Catholic family in the Milltown area of Bathurst to his tough widowed grandfather living an impoverished subsistence life on a small property at Limekilns, 26kms out of the city. Ben ... Read more
Read More

Churches and Bars

I’m not much of a Sunday church goer, but what wonderful heritage we have with our churches in Bathurst.  If you get the chance, any day of the week check out the magnificent Coburn paintings hanging in the Anglican Cathedral in Church Street, and my favorite, the organ and sensational balconies inside the Uniting Church ... Read more
Read More

Evergrande: A timely reminder about risk

Just a fortnight ago, most of us hadn’t even heard of the Evergrande Group.  But recent developments have changed that. Just in case you missed it, Evergrande is a Chinese property developer that has run out of cash.  It is probably going to default on its debt obligations. The big problem is, Evergrande is massive ... Read more