Inflation. What is it? What does it do and can it ever be a good thing?

More than likely you have read, heard and seen all the reports and articles about the rising cost of living and the impact it is having on the economy.

At Foxplan over the past few weeks, we have been asked a few questions by both clients, staff, and advisers about inflation and the overall theme of these questions is:

·         What is inflation and how can I make my money work for me better in a time of rising costs?

·         Can inflation ever be viewed positively?

·         Do I need to worry about my investments?

So, we thought - why not break inflation down and try to make it easier to understand!

Inflation is the term used to describe a rise in average prices throughout the economy.

Inflation is most commonly measured by the consumer price index (CPI). The CPI tracks the price of a large fixed ‘basket’ of goods and services such as:

  • food

  • housing and household utilities

  • health

  • recreation and culture

  • education

  • communication

  • clothing and footwear

  • transport

  • alcoholic beverages and tobacco

  • household contents and services

  • miscellaneous goods and services.

The CPI choose the items and determine their importance based on Kiwi spending patterns. The CPI ‘basket’ represents how Kiwi households spend their money.

We’ve explained how Inflation is measured but what is it currently in New Zealand?

The most current annualised inflation rate is 6.9% which is the highest it’s ever been in New Zealand since 1990!

This means for the average Kiwi your weekly shop may increase, technology and other consumables cost more, basically put your dollar is worth less, so goods will cost more to buy.

The underlying cause is usually that too much money is available to purchase too few goods and services, or that demand in the economy is outpacing supply. In general, this situation occurs when an economy is so buoyant that there are widespread shortages of labour and materials.

People can charge higher prices for the same goods or services.

Can higher inflation rates ever be a good thing?

Inflation is generally viewed negatively but a little inflation can be healthy for stimulating an economy. It can boost consumer demand and drive economic growth.

 

what can you do to mitigate the effects of inflation?

Whilst you can’t avoid inflation, you can help plan for it and our advisers are on hand to help you with any questions you may have.

However, during times of uncertainty and inflated prices, some companies may also experience staff shortages – this might be the best time to ask for a pay rise.

If you haven’t reviewed your mortgage in a while, it may benefit you to have a chat with our mortgage adviser to check if your loan is still structured correctly to suit your current needs.

If you are concerned about your future money plans or having enough in the pot to retire why not book a free discovery call with one of our financial advisers?


 

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