Australia has an inflation problem, but there’s a silver lining

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By now, you’ve probably heard the news: Australia has an inflation problem. I’m not talking about a run on bouncing castles (unfortunately I’m still waiting for that day), but the much more sobering issue that everything just keeps getting more and more expensive.

At the end of January we were hit with the news that headline inflation, otherwise known as the Consumer Price Index (CPI), rose 3.8 per cent in the 12 months to December, an increase from 3.4 per cent in November. This led the Reserve Bank to raise interest rates on Tuesday, with warnings more hikes might be required as inflation is set to get “materially” higher.

Just as a refresher, CPI measures the percentage change in the price of a basket of goods and services consumed by households, including things such as groceries, fuel, housing and recreation. The most recent increases were fuelled by a jump in electricity prices, and other areas such as red meat also rose.

What’s the problem?

By now, most of us know that high inflation prompts rate rises from the RBA, as forcing people to spend more on their mortgages means they spend less elsewhere, lowering the demand for goods which then, in turn, lowers their prices (at least in theory).

This leads to the general view that high inflation is bad for mortgage holders and good for savers. It’s also bad for anyone who has to buy things that cost money, so, all of us.

What you can do about it

But there are a number of lesser known situations where inflation can actually be a good thing, so if you’re searching for a silver lining to this whole debacle, read on:

• A boon for your super: While those of us who are working are quietly (or loudly) grouching about rising prices, those who are retired or nearing retirement might actually be viewing it as a positive. This is because the CPI measure directly affects two crucial parts of our superannuation system: your contribution caps, which dictate how much you can put into super each year, and the Transfer Balance Cap (TBC), which restricts how much super you can move into the tax-free retirement phase. These are both reviewed each financial year, explains Gemma Mitchell, head of education at Rask, and the CPI figure is a critical aspect the government considers when looking at how much to increase them by. “Based on current inflation and economic data, there’s growing expectation that from July 1 we could see the concessional contributions cap increase to $32,500, and the non-concessional cap increase to $130,000 per year,” Mitchell says. “[Similarly] there’s a strong likelihood the TBC could increase again to $2.1 million.” This is great for anyone looking to add more to their super, and while it might not seem like much of a boon now, it can make all the difference once you retire.
• Good for (some) investments: As inflation rises, it can have different effects on shares and investments, William Buck partner Scott Girdlestone explains. Assets such as bonds or term deposits, which provide investors with a fixed rate of return, can become much less appealing in a high inflation environment as their payouts don’t keep up with rising inflation. “By contrast, some companies can adjust their prices when their own costs rise, so parts of the share market may hold up better in an inflationary environment,” Girdlestone says “These include materials, which we’ve seen has been a solid performer in the Australian equity market over the past few months as inflation pressures have moved higher.” Keeping a focus on more staid, “boring” stocks (known as value stocks) over high-growth businesses can also be a smart move. Overall, Girdlestone stresses the importance of having a diversified portfolio in times of high inflation, saying a broader mix gives investors a better chance of keeping their savings growing faster.
• Wages grow (at least in theory): When the price of everything rises, wages are supposed to grow in tandem, as workers have a better case to request pay rises. And generally, yes, wages have been rising, up 3.4 per cent in the 12 months up to September last year. But unfortunately “real wages” – which is wage growth adjusted for inflation – is likely to slide, with wages likely to stagnate over the year while inflation grows, deteriorating the buying power of your hard-earned.
• Savings: Finally, I thought I’d just quickly touch on how inflation affects your money in the bank, as it’s a bit of a double-edged sword. On one hand, higher inflation means interest rate rises are more likely, which increases the amount of interest you earn on your savings – that’s great. On the other hand, inflation means things are more expensive, so the money you have in the bank doesn’t stretch as far – that’s less great. So an inflation bump can feel a bit bittersweet for those diligent savers.

Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.