when will we be getting paid more or Inflation explained …
Inflation – it’s everywhere!
I thought I’d dedicate this week’s blog to explaining what inflation is and how it impacts us individually.
Inflation is the increase in the price we pay for goods and services.
The annual rate of inflation in Australia today is 2.6 per cent. In other words, the price we pay for things like milk and a loaf of bread has increased by 2.6 per cent since this time last year.
Or put another way, a coffee that cost you $4 last year would now cost you $4.10.
For context, in the past 30 years the average rate of inflation in Australia was just above 2 per cent.
In the seventies and eighties inflation in Australia was much higher, sitting above 10 per cent a year for most of those decades.
In 1975, the inflation rate was 18 per cent, which would have pushed your $4 coffee to $4.70 in the space of one year!
Why is inflation important?
Well, as the above example shows, inflation impacts our budgets because it impacts how much we have to pay for things.
Inflation also impacts how much we get paid (defined as ‘wage growth’). As we get paid more, we spend more, creating demand for goods and services, and pushing prices up (i.e., inflation).
You typically don’t see inflation without wage growth at a similar or higher rate (more on that below).
More broadly, a healthy rate of inflation is good for the economy; it drives economic growth and generates wealth for households.
We don’t want inflation to be too high or too low. We want our inflation like Goldilocks wanted her porridge; not too hot, not too cold, but somewhere in the middle.
The Reserve Bank of Australia (RBA) considers the ‘Goldilocks zone’ for inflation to be between 2 per cent and 3 per cent. It considers that a ‘healthy and sustainable’ rate of economic growth.
If it needs to slow down the rate of inflation, the RBA increases interest rates and if it wants to increase inflation it reduces interest rates.
Because inflation affects interest rates in this way it also affects how much we, as borrowers, have to pay for the money we borrow.
So, if inflation is sitting smack bang in the middle of the ‘Goldilocks zone’, the RBA would be happy, and right to leave things as is, wouldn’t it? Not quite.
The reason inflation is in the headlines lately is because, even though it’s sitting in the ‘Goldilocks zone’, the RBA isn’t happy.
That’s because increases in inflation and the prices we pay for goods and services at the moment, is not being driven by wage growth. It’s being driven by supply shortages.
The RBA has said numerous times it wants wages to increase before it increases interest rates, even if we do experience some high inflation in the short term because of supply shortages.
Wage growth is below 3 per cent today and needs to be above 3 per cent to have a meaningful impact on inflation.
The bad news is we’re probably going to be paying more for our groceries and petrol in the coming months but the good news is that interest rates won’t be increasing until we start getting paid more.
With inflation increasing faster than wages, it’s never been a more important time to manage our expenses.
House insurance increase
Q – How much should I be paying for my house insurance? I received my premium this week and it’s increased significantly on this time last year.
A – Great question and I hear you! At the start of January, I received three insurance premiums in one go.
Fortunately, despite three large bills landing at the same time, I had been disciplined throughout the year, making my contributions to my ICE (in case of emergency) savings account.
Unfortunately, my premiums increased by 20 per cent across all three policies (that’s much more than inflation!).
Whenever my insurance premiums come in, I set aside an hour to do some shopping around with insurers. I’d recommend you do the same because, unfortunately, I’ve found loyalty doesn’t pay when it comes to insurance.
The best part is you don’t have to sit on hold for 10 minutes at a time these days; it can all be done online. Here’s how you can save a few dollars.
Shop around: I went online to get three quotes on the same house. Three different insurers, using the same details and assumptions, gave me three quotes that varied by as much as 30 per cent with the cheapest quote $100 less than the amount my current insurer was seeking to charge.
Check the Insured amount: In doing my research I found that the insured amount (the amount of money you would be paid to replace your house or car) differed greatly. I researched what the cost would be to demolish and rebuild the house (or replace my car for that policy) and made sure all three quotes had the same insured amount in the quote. That knocked another $100 off.
Change the Excess: Most insurance policies automatically select the lowest possible excess. It will come down to what’s comfortable for you. I personally increase my excess from $500 to $2,000 and that generally reduces my premiums by another $100.
Total savings of $300 on one quote. On the three policies I saved myself just under $1,000 by doing an hour’s worth of research.
Author, BULLETPROOF INVESTING