Let's get started with the definition of inflation. So, what is Inflation by the way?
"Inflation is an increase in the level of prices of the goods and services that households buy"
(Reserve Bank of Australia, 2021).
The below graph shows Australian Consumer Price Inflation over a period of 30 years:
It can be seen that we are at the highest level of inflation rate since 2008 GFC, at 3.8% in the June Quarter 2021.
Let's take a closer look at the detailed CPI for each industry (source ABS) and how many percent change in comparison with the last quarter and the last year figures.
Inflation is a hidden factor that leads to potential loss of your portfolio, especially if your portfolio is not doing well enough.
When inflation is on the rise, the price of goods increases and your wealth will reduce gradually over years.
The best method to protect yourself from inflation is to have a source of income to at least offset it. The source of income I mention here could be:
1. Stock investment return or managed fund investment return
2. Stock dividend payment - if you hold the good stocks over years
3. Real estate property investment return (can be either positive gearing or negative gearing, providing that the ultimate result over a period of time can offset the inflation rate)
4. Don't forget your superannuation! Most high ranking superannuation funds have an efficient investment strategy over the long term. Considering putting your spare money as salary sacrifice or other methods might partially solve the inflation related issues. What to consider when choosing the super fund: historical performance (10 years, 5 years, 1 year), administration fee, fund management fee, exit fee etc.
5. Another source of income to offset inflation rate can be hobby income. When you have a hobby or talent, convert it into income if possible.
In a nutshell, don't put your money in the piggy bank or anywhere where you do not earn interest which is greater than the inflation rate. Make sure your money is working hard for you during this tough time, NOT the other way around.
Disclaimer: The information provided is general information only. It does not take into account your circumstances. It’s important to consider your particular circumstances before deciding what’s right for you. You should not rely solely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, we do not accept any liability (whether under contract, tort or otherwise) for any resulting loss by or damage to the reader or any other person.