Jacqueline Barton

Post-pandemic economic shrinkages coupled with the Russian invasion of Ukraine in early 2022 have seen inflation spike to the highest level since the Great Inflation of the 1970s.

This surge in inflation has prompted the Reserve Bank of Australia (RBA) to increase cash rates, making it difficult for new homeowners, with the situation looking to deteriorate before it improves.

What can we learn from the rise of inflation and consequent interest rate spikes that plagued the 1970s and 1980s? Let’s find out.

Cyclical nature of interest rates

The interest rate cycle and the economic cycle are intimately connected, and interest rate changes should, in theory, follow the economic cycle. Central banks raise interest rates to slow down the economy and avoid inflation if the economy is growing rapidly and inflationary pressures are increasing.

Global inflation sharply increased from 2% to 6% from 2021 to 2022. This was much higher than the inflation targets set by central banks in advanced economies and emerging markets. Economists predicted even higher inflation to come and further cash rate rises to slow down the economy.

What does this mean for interest rates?

Interest rates are typically increased to curb the rise of inflation and ease it back to within the range of inflation targets, which is around 2%. By raising interest rates, the Reserve Bank hopes to deter consumer spending and limit the purchase of high-risk assets, such as real estate.

Since 2009, we have seen modest inflation and more importantly record low-interest rates. This gave consumers spending power that became easily taken for granted.

However, the onset of the COVID-19 pandemic and shortages of commodities, like wheat and gas caused by the Russian invasion, saw inflation rise higher than expected.

How does this compare to the 1970s?

The rapid inflation rise in the 1970s was due to oil shortages in 1973 and 1979. The shock in oil prices saw interest rates climb to nearly 20%. Before that, economies had enjoyed a relatively stable level of inflation – similar to what we’ve experienced over the past decade.

Several months of high inflation resulted in tighter than expected monetary policy and the subsequent crippling of the economy in the 1980s. The global economy is now seeing a similar trend, and if the 1970s are anything to go by, we may be facing a deep recession in years to come.

Then and Now

The 1970s started with a home loan interest rate of 5.88%. The average home cost between $17,000 and $25,000, and banks would loan 2.5 times the amount of a person’s salary to buy their first home.

An average 40-year-old with a yearly income of $8,200 could take out a loan of $20,500 to buy their home and confidently pay it back within a few years.

Fast-forward to 2022 and Australia’s average house price is $920,100, the home loan interest rate is 2.63% and the average yearly salary is $87,070.

The difference between housing prices and income is now 10-fold, and banks will not support the huge multiplier difference between salary and property price because it puts them at a much bigger risk.

Mortgage stress rates

In March 2022, according to Digital Finance Analytics, around 42.2% of mortgaged households were assessed to be in financial distress in Australia. Households are labelled as in “mortgage stress” if they continuously spend more than their net income.

This spells trouble for the housing market as more individuals struggle to pay their monthly mortgage.

Tips and strategies

How can you tackle high interest rates and keep more of your hard-earned money?

• Take out a personal loan with a low-interest rate to consolidate your credit card debt. This will assist you in saving money and paying off debt. The average interest rate on personal loans is often lower than credit card interest rates. For example, the average credit card interest rate was 16.31% as of 31 May 2022, while the average personal loan interest rate was only 10.28%.
• Take out a debt consolidation loan. This can be an effective way to consolidate several debts and another way to avoid high interest rates. The new loan should ideally have a lower interest rate than the one you presently have.
• Talk to your financial adviser. They can provide expert advice to assist you with debt management and help with cashflow and budgeting.

There’s a delicate balancing act between inflation and interest rates. We can only hope policymakers learn from the Great Inflation in the 1970s and we do not see such high interest rates again.

Why contribute to super?

Despite frequent changes to its governing rules, superanhttps://www.canva.com/photos/MADE9h69SUc/nuation remains, for most people, a tax-effective environment. Super is a long-term investment which utilises time in the market and compound interest to build wealth, which will fund your retirement.

What types of contributions can be made?

• Concessional contributions. These are contributions that are made your pre-tax income. They are taxed at 15% within the super fund opposed to your marginal tax rate. If you earn more than $250,000 pa you will be taxed an additional 15% on the concessional contributions above this threshold.
• Non-concessional contributions. These are contributions made with your after-tax income and have not been claimed as a tax deduction.

Note: Limits apply to the amounts you can contribute.

Adding to super

Making additional contributions is a great way to boost your retirement savings and can help reduce your overall tax for the financial year.

You can calculate your projected superannuation at retirement age with the Money Smart calculator and the effect regular contributions will have on your overall super balance at retirement age.

https://moneysmart.gov.au/how-super-works/superannuation-calculator

Who can contribute to super?

The rules around superannuation are consistently being refined and altered.

Refer to the ATO’s website for guidelines on whether you are eligible to make contributions into your superannuation fund.

https://www.ato.gov.au/Individuals/Super/

Get it right

A successful super contribution strategy can mean the difference between looking forward to retirement and dreading it. Super is a complex area and further rules apply in some situations. Getting things wrong can be costly so talk to your qualified financial planner and get the right advice on the best ways to boost your super.

It is commonly assumed that seeking financial advice is for the wealthy, and it only helps the rich become richer, yet financial advice can prove useful to anyone who wishes to better their financial future.

Financial advice is like getting a health check-up for your financial situation. Your financial adviser is like your personal trainer, assisting you in achieving your best possible financial health.

Seeking professional financial advice provides you with a clear path to achieve your financial goals, and that is an investment worth making.

Why invest in financial advice?

Financial advisers help with informing their clients and leveraging each individual’s circumstances to best reach their set financial goals. Advisers will also help you make financial decisions throughout your journey that are in your best interests, which can be priceless when clients are unsure of what decisions to make.

Financial advice isn’t only about investing your money in the share market. Want to save to buy your first home? Want to protect your children in case of your death? Want to enjoy a comfortable retirement? Don’t understand what to do with your super or how to invest in the share market? Think of a financial adviser as a one-stop shop for the majority of your financial issues in life.

Is financial advice cost-effective?

The financial advice industry has undergone a monumental transformation following the Financial Services Royal Commission of 2017-2019. As a result, new education and compliance requirements have been legislated to further protect the client’s best interests.

This has led to a drop in the number of financial advisers Australia-wide – from approximately 28,000 in 2018 to just 19,000 in 2021.

The silver lining here is that while there are fewer advisers to choose from, the quality of advice is deemed to improve exponentially.

A financial adviser can be a sounding board for your financial ideas, a resource to answer the simplest or most complex of queries, provide research-backed recommendations, and guide you over the long term based on their experience.

Ready to make the investment?

Your day-to-day job may not allow you to focus on the financial aspect of your life. In contrast, your financial adviser’s primary responsibility is to help you handle your finances efficiently.

So, are you ready for your financial check-up? Take the first step and book an appointment with one of our financial advisers today.

So, what is inflation and how does it affect you?

In simple terms, inflation signifies a rise in the price of goods and services and a reduction in purchase power, meaning you pay more for every purchase you make.

Do other countries influence Australia’s inflation rate?

It is not a surprise that countries in today’s world are more connected than ever before. Therefore, a rise in other countries inflation rates can also directly affect Australia’s inflation rate.

However, the degree and timing of its impact will vary. Consider our current fuel prices for example, Moscow’s invasion of Ukraine has led to sanctions against the Russian Federation, cutting off the world’s second-largest oil producer from global supply chains. Thus, increasing the cost of fuel worldwide.

What will be the effect on investors?

A rise in inflation affects investment markets negatively due 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 loan, 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.
• Consider fixing at least part of your home loan to limit your exposure to rising interest rates.
• 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 always consider averaging your position to avoid market timing risk.
• For investment purposes, consider having exposure to well-established companies’ “blue chip stocks” vs riskier stocks. Investors often find comfort in knowing their funds are exposed to good quality companies with strong balance sheets.

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.

Adequate estate planning ensures that when we die, our assets can be passed promptly and tax-effectively to the people we love or the charities we support.

If you were to pass away without having updated your Will to reflect your intentions, your children, family members, spouse or partner may not receive the protection you would have desired. The process of finalising your estate without a Will becomes complicated, costly and time-consuming.

As life changes, your Will should be updated to reflect those changes.

Many events may trigger a need to review your Will, such as:

• Marriage or entering a de-facto relationship;
• Divorce;
• Changes in the family such as births and deaths;
• Adult children entering or leaving marriages or de-facto arrangements;
• Death of a person who plays a key part in the estate plan such as the executor.

Think about your affairs and ask yourself, is it time to update my Will?