Mortgage interest rate changes are directly related to inflation, as rising inflation will translate to higher monthly payments. While industry observers acknowledge that there is a lag between this and mortgage rate changes–some 12 to 18 months before consumers personally feel the pinch–the impact of inflation is inevitable and needs to be prepared for.
The macroeconomic effects of inflation are only some of the changes in the financial industry that consumers need to consider as they navigate the next decade and build their wealth. Changes in the global economy, a multipolar world and the increased necessity for digital currencies all work together to create different opportunities to invest and grow their savings.
Inflation presents another challenge, but when consumers know what to expect, they can stay on track with their savings goals and make sound investment decisions.
What is inflation?
Inflation is the rate by how much the price of goods and services will increase and determines how much the average consumer can do with their money.
This refers to the overall rise of goods and services, which is why it’s commonly expressed as a percentage. This may seem abstract, but in concrete terms, it’s the feeling that consumers can buy less with the same amount of money, as time passes and the rate rises.
For example, you may have been able to buy one kilogram of broccoli in 2020 for AU$11.50, when inflation was at 1.8% as per the Department of Treasury Consumer Price Index, so you could buy an average of 350g head of broccoli for AU$3.28.
If you want to buy broccoli now then you’re paying around AU$3.40, as inflation has pushed the price up to AU$11.90. According to produce supplier Foodbomb, stockists have passed the increased cost per box to consumers, which shot up from AU$42/box to AU$95/box.
It’s possible to monitor the increase in the price of one particular product, but more than one item or service is necessary to produce it. Things like food grains, metal, fuel, utilities like electricity and transportation, and services like healthcare, entertainment, and labour all increase the price of an item when the cost of these goods and services rises at once.
Inflation aims to show the overall impact of price changes on various products and services. Multiple categories to observe can be a challenge to monitor, so one rate of inflation allows for a singular percentage to take note of.
Extended periods of high inflation are often the result of lax monetary policy. When there’s too much money circulating around one economy, growing bigger than the size of the economy itself, the individual value of the currency shrinks; consumers can buy fewer goods with the same money and prices rise.
Aside from too much money in circulation, inflation can be caused by shocks to either the demand or supply sides of the economy.
On one hand, disruptions to the production chain like calamities or the global halt in manufacturing in the early periods of the COVID-19 pandemic reduce the total supply of goods and raise the price of goods, termed cost-push inflation.
On the other hand, stock market rallies and excessive use of expansionary policies like lower interest rates or increased government spending can strain an economy’s production capacity and raise prices in demand-pull inflation.
Consumer expectations also have an impact on inflation. If firms think prices will rise significantly, they tend to integrate these expectations into wage negotiations and contract price adjustments like automatic rent increases.
The next period’s inflation rate is partly set by these habits; when contracts are effective, wages or prices rise as agreed, and expectations are fulfilled. The more people base their expectations on recent memory, inflation will follow familiar patterns over time.
How does inflation affect your money?
Inflation forces companies to pay more for the raw materials that compose the products consumers use, and this increases the price as a whole.
Consistently rising prices also lower the value of key assets such as savings or fixed assets like bonds. If your assets are mostly in cash or bonds, you will find lower real value in inflation periods because prices of some goods will rise at one point and other commodities later on.
The general price level increases over time and decreases purchasing power, but it’s not as if inflation stops when the rate decreases; purchasing power and prices change even when the rate is lower, which affects relative prices, wages and rates of return on investments.
If you have debt with a variable interest rate, like mortgages or credit card debt, your minimum payments will likely increase as inflation rises.
Prospective home buyers will also see prices of homes rising along with the rate of inflation, while homeowners or property investors may find that their properties are appreciating in value. Fewer homes that can be built given the higher costs of construction keep supply low, and the demand kept high by consumers who have no choice but to keep renting.
You will find that periods of high inflation can change your spending habits and attitudes because the decreased purchasing power will motivate you to find ways to spend less with the money you have and make you less prone to taking more risky investment options.
3 ways to shield your hard-earned savings from inflation
The headlines make inflation out to be daunting, but fortunately, there are a few ways to blunt its effects on your personal finances. We’ve shortlisted three major steps you can take to weather the storm while still staying on track with your investment goals.
1. Find ways to spend less
Rising costs all around mean that consumers can do less with their money, so your lifestyle needs to keep up with these conditions.
Rising costs all around mean that consumers can do less with their money, so your lifestyle needs to adjust to these conditions. One way to start is to review your monthly household spending and sort costs between fixed and discretionary expenses.
Fixed expenses are essentials that you don’t have much room to adjust; these are mortgage or credit card payments, rent, transport, food costs and insurance. These are expenses that you can’t avoid and are generally a constant cost you plan for.
In the case of mortgage or credit card payments, skipping payments often mean additional penalties that stress an already tightened budget so you need to deal with them ahead of time and adapt to any rate increases.
On fixed expenses like food, you can stock up on staples, stick to a grocery list, compare store prices to get the best deals and switch menus to more affordable alternatives. For fuel costs, using a price-tracking service, being more strategic about driving routes and signing up for loyalty programs can help soften the blow of price increases.
Discretionary expenses are costs on dining out, vacations, regular haircuts or shopping; these can quickly empty your account if you don’t pay attention to where the money is going.
While cutting out these expenses will take some getting used to, being mindful of discretionary expenses and delaying costs when possible will provide you with a bit more funding to work with even during inflation periods.
All purchasing decisions generally have cheaper alternatives, as long as you’re prepared to delay buying and look for more low-cost counterparts.
2. Increase your savings
Adding to one’s savings doesn’t automatically mean seeking a high-yield savings account.
An online savings account is one way to increase the money you set aside, as it keeps you from spending funds directly as you would with a regular transaction account, so it’s difficult to dip into your savings.
Aside from setting up a different account, building habits like keeping track of expenses and starting a budget can help increase your savings.
Noting your regular expenses and seeing your spending habits listed out in even a simple note will help you pick out where you can cut back. When you know how you spend your money, you can adjust your existing budget to be more realistic and review your progress relative to your spending goals.
3. Diversify your investments
While most assets are able to keep up with inflation, stock markets and other fiat-based investment options may be affected by monetary policies put in place to mitigate inflation.
Consumers need to have more than savings and a few stock options to ensure that their wealth continues to grow in spite of economic slowdowns, which is where gold comes in.
Having a diversified portfolio is important in situations where prices are continuously rising, but maintaining a basket of wholly high-risk investments may offset the hedging effect you’re aiming to keep during inflation periods. Investing in gold is a lower-risk option because it has proven to be resilient even in the face of global economic downturns or historical conflicts.
Gold value is not based on public trust in fiat currency or government legal tender, so it’s less vulnerable to the volatility of the market and protects savings despite rising prices.
Inflation can be a wholly overwhelming experience and present serious obstacles to your goals if you aren’t prepared to adapt.
With enough information, the right tools and a realistic budget, you’re more likely to come out on the other side of a difficult inflation period with your savings intact. Check out our website – we will help you find the gold in your portfolio.