The effect of rising inflation

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.