A few months ago, we addressed growing concerns about managing inflation and how it impacts your investment decisions. At the time, in August 2021, inflation was at a rather alarming 4.3%. Since then, the rate has slowed somewhat, but serious global supply chain issues are bringing the inflationary pressures into sharper focus.
The Reserve Bank of Australia’s (RBA) best efforts notwithstanding, inflation is on the uptick—3.8% in the second quarter of 2021. That’s the highest since the beginning of the great recession of 2008, and the fundamentals of the economy, combined with global supply chain problems, suggest that Aussies buckle up for a financially bumpy flight. Inflation and investing are not mutually exclusive; read on to find out how to invest against inflation.
Smart investors are meeting with their financial advisors to develop strategies for weathering this oncoming period of inflation. If you haven’t made an appointment with your advisor, make it a priority—especially if you’re retired or nearing retirement age.
In short, the economic after-party from Covid is over—people are back at work, back in school, and demand for goods and services is outpacing available supplies.
What is driving the future of inflation?
Whether this current inflationary period is a supply and demand blip or baked into the economy is a detail; your task is to ensure growth and income in less than ideal market conditions. And yes, your investments can outpace inflation. The conventional wisdom is to plan for high inflation over the next year to eighteen months, but the future of inflation is uncertain. One of the downsides to this global economy is that Australia’s economic fortunes are tied to those of China, which is facing tremendous economic pressure and the likely collapse of its biggest real estate developer, and the US, which is just a mess.
Is inflation ever good for the economy?
Inflation is a tricky situation. Economists think that moderate inflation is a good thing—it indicates a growing economy, where the demand for goods outstrips supply. At the ground level, this means your fellow Aussies are buying more stuff, from next-gen electronics to home furnishings to new houses—there is plenty of disposable income floating around, which means employment and wages are strong. So a supply/demand inflationary force is not necessarily a bad thing.
It gets dicey when the issues are the demand/supply inversion, which is what economists are predicting now. There aren’t enough goods for consumers to buy, which means prices spiral—at its core, that is the point of the free-market economy. The problem is, out-of-control petrol prices put pressure on more than just your wallet; prices across the board rise as shipping costs balloon, so your shopping dollar doesn’t go nearly as far. This is hyper-inflation, and there is concern that the current supply chain issues are creating an artificial inflation period that will subside as goods start moving again.
The problem with this theory, even if it’s correct, is that nobody is forecasting a magical solution for all those jam-packed containers sitting in port to unload and stack goods on retail shelves. Shortages in everything from truck drivers to computer chips means that rising inflation is here for the foreseeable future.
The government is keeping a close eye on inflation
The RBA is already committed to holding the bank rate at .1%, so combating further inflation will take more government intervention.
What policymakers are trying to avoid is disinflation after the current inflationary period abates. Deflation indicates weak demand, which, left alone, can easily devolve into recession. The last period that hit that benchmark for a prolonged period was the Great Depression.
The takeaway here? Don’t fret about moderate inflation; it means the economy is balanced and growing. Plan for short—in economic terms—periods of hyperinflation so that your investments withstand those storms. Historically, or at least since 1929, the government and other policymakers will step in to head off any trends towards deflation.
Government bonds can be a safe haven
Many investors shy away from government bonds because they don’t have particularly aggressive return potential. Quite true. They are also the safest investment you can make that isn’t cash, and they do offer a guaranteed return. So for a steady income stream during inflationary periods, Australian government bonds can supply a safety net.
Most superannuation funds invest heavily in Commonwealth Government Securities because they are so low risk and provide guaranteed income. These government bonds pay a regular return (that reinvests in your super) until they mature, when you get the principal and any accrued interest back.
Ask a financial advisor for guidance
As you can see from our previous two articles on inflation, the opportunities for maintaining your assets during an inflationary period are wide-ranging and carry their own risks. The best way for you to determine your strategies is to meet with a financial advisor to go over your goals, your timelines, and your risk aversion.
If you’d like some information on how to balance your portfolio and manage your assets, please Super Network for a consultation. There’s no obligation, and it’s free.
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