The Impact of Inflation on Our Everyday Lives

Remember when a tenner could get you a decent lunch and filling up the car didn't feel like a second mortgage payment?

Everyone has been feeling the pinch at Woolies, paying for fuel, and even when enjoying a cappuccino. It's like your money is shrinking faster than a cheap t-shirt in the wash! To put it into perspective, the price of beef has increased by 6.3% just in the past year, which makes a weekend BBQ a lot more expensive!

How Aussie Households are Feeling the Pinch

Inflation isn't just an abstract economic concept; it's something we feel every time we swipe our debit cards or check our bank accounts. Rising prices are still affecting everyday Aussie households:

Grocery bills soaring: The ABS reports that food and non-alcoholic beverage prices rose by 2.9% in the year to November 2024. This means families still have to make tough choices about what goes in the trolley, even if the increase isn't as dramatic as it was over the last 2 years. You can find the details here.
Petrol prices are unpredictable: Petrol prices have been on a rollercoaster ride and can go from surprisingly low to eye-watering in the space of a few days (or a few km!).
Rent and mortgage stress: Australia’s housing crisis doesn’t seem like it’s easing anytime soon. The average person is feeling this through mortgage stress, unpredictable rent increases, and of course, soaring property values. Housing has contributed to inflation and has also been impacted by it. While the easing of interest rates is predicted for this year, economists doubt that this will bring housing costs down (in fact, it’s anticipated to drive them higher).

How does inflation impact shares or real estate?

Inflation doesn't just affect your weekly grocery bill; it also has a significant impact on your investments and retirement funds.

For share investors, inflation can be a double-edged sword. On the one hand, companies may be able to pass on increased costs to consumers, leading to higher profits and potentially boosting share prices. On the other hand, high inflation often creates economic uncertainty, making investors nervous and potentially causing share prices to decline. To navigate this tricky landscape, it's crucial to diversify your investments across different sectors and companies to reduce risk. If you like to select your own shares (instead of using ETFs for example), focus on companies with solid financials, proven track records, and the ability to adapt to changing economic conditions.

Real estate has traditionally been seen as a good hedge against inflation (the value of your property can generally increase, depending on location). However, rising interest rates have made borrowing more expensive, making it harder to secure a mortgage (particularly for an investment property). Given the multiple factors at play in the Australian housing market, we’ve seen house prices escalating at the same time. This has ‘priced out’ many would-be investors in real estate while rewarding those who bought property before it ‘boomed’.

When planning your investment strategy, it’s good to think about how you can protect against the impacts of inflation, rising fees & costs, or interest rate fluctuations. Consider your timeline as well - for example buying real estate at the peak price might require holding it for quite a few years to see a capital gain.

Is Cash really King?

It can be tempting to hoard cash when things feel uncertain. But holding too much cash can be a bad thing in times of inflation. Why? Because your money is losing value.

If you have $100 today and inflation is 3%, that 100% will only buy you $97 worth of goods next year. This “purchasing power erosion” is especially dangerous for long-term goals like retirement.

So how do you make your money work harder, even with inflation sticking around? You need to choose things that will outpace inflation, and grow wealth over the long term. Diversifying your investments - spreading your money across different asset classes like shares, property, and bonds - is probably the most accessible way of doing this.

Being alert to the dangers

When you’re young, you’ve got time to weather inflationary economic seasons. However, when you’re approaching retirement, it’s something you have to be more careful of. For example, some may keep large portions of their superannuation fund in cash, or withdraw their retirement fund in one lump sum. Both of these situations will see some or all of that retirement fund slowly reducing in value.

And, if you’ve had a large portion of your superfund in cash for some time, you have lost out to both inflation and not benefiting from share market growth over that time.

While the appropriate retirement fund strategy for you will probably include a portion in cash, it’s valuable to continue with some diversification into retirement. The right balance of investments is best determined as part of a holistic retirement plan. If you’re unsure of how to plan for this, reach out to our experienced retirement planners for more information.

More Ways to Anticipate and Manage Inflation

Beyond the day-to-day savings strategies, here are some additional steps to consider:

➔ Review your debt: High-interest debt, like credit card debt, becomes even more expensive during periods of high inflation. Prioritise paying down those debts as quickly as possible.

➔ Consider fixed-rate loans: If you're considering taking on new debt, such as a mortgage, explore fixed-rate options to provide certainty and protect yourself from rising interest rates.

➔ Build an emergency fund: A financial safety net is crucial during economic uncertainty. Aim to have 3-6 months of living expenses saved in an easily accessible account.

➔ Stay informed: Keep an eye on economic news and inflation forecasts. This will help you make informed decisions about your spending, saving, and investing.

➔ Seek professional advice: If you're feeling overwhelmed or unsure about how to manage your finances, ask us how a financial planner could help.

Being proactive and understanding how money and inflation works can help you deal with it more confidently. Every little bit counts! We might not be able to control the economy, but we can control where our money is kept and where we’re spending it to make sure we're getting the most bang for our buck.

Question from a client:

I'm feeling a strong urge to take early retirement. I'm 58, with about a year of accrued leave. I estimate that my super will sustain me for 25 to 30 years. Should I prioritise my well-being and retire now on my own terms, or wait?

It’s fantastic that you’re in a position to consider early retirement at 58 - well done! If you feel confident that your financial situation will allow that, then I say go for it. Here are a few things to consider to make sure you’ll be successful in having a great retirement:

1. Financial Readiness:

Superannuation: As you were born in 1967, you won’t be able to access your super until the preservation age (60). With your year of leave, that leaves you with a year until you can withdraw your super. If you want to retire now, perhaps you have other means of funding your early retirement such as investments or the sale of a property.After the age of 60, you can access your super as a transition-to-retirement pension, or account-based income stream, or withdraw it as a lump sum (you’ll want to look into the tax implications of each option). I suggest that you might want to wait at least 1 more year, then use your accrued leave to get you to preservation age.
Age Pension: You’re not eligible for the Age Pension until 67, so factor in those years without government support.
Healthcare: Consider potential health insurance costs and out-of-pocket expenses as you’ll be younger than most retirees.
Detailed Budget: Your calculations are a great start. I also recommend creating a comprehensive budget to understand what you’re spending now, and what kind of lifestyle you want to live. Seek advice from a financial advisor to make sure your money will last those 25-30 years.
What Ifs: Do you have plans in place for dealing with unexpected expenses, like a health crisis or home repair? Are your income streams set up to withstand market changes? Do you have built-in flexibility in case your retirement goals change? Think about how you can give yourself options.

2. Life Beyond Work:

Purpose and Passion: Create a plan for what you want to fill your days with. Travel, hobbies, volunteering, spending time with family? Having a clear vision can make your retirement more fulfilling.
Social Connections: Work often provides social interaction. How will you maintain connections, make new friends, and avoid isolation? Our friendships are one of the most important parts of living a long and happy life. Will you be living close to loved ones, or will you need to make an effort to stay connected from a distance?
Mental and Physical Health: Think about how you will stay active and mentally stimulated. A 2016 study found that delaying retirement was linked to an 11% lower risk of death over 18 years - because of the social and physical benefits we get from working.

Being able to retire early and enjoy that freedom is a gift. Weigh your financial security and talk to a financial adviser to get your ducks in a row. Think about your personal goals and emotional readiness. Then, enjoy your freedom and the new possibilities that await you!

Super Guarantee Rate Increasing: Important Reminder for Employers

The superannuation guarantee (SG) rate is increasing again this year, up to 12% of an employee's ordinary time earnings by July 2025. If you’re an employer, make sure you stay informed about the current SG rate and payment deadlines to avoid incurring the super guarantee charge (SGC) for unpaid super. The ATO website provides detailed information.

Overall, the outlook for the Australian economy is positive, with growth expected to pick up as the central bank eases monetary policy. However, the unemployment rate and the impact of global economic conditions remain key factors to watch.

For more clarity on how advice could help you, please feel free to get in touch with Essential Wealth and Retirement:

P. 02 5562 6260 (Ballina)

P. 07 5230 4198 (Gold Coast)

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A word of caution for - the included material in this newsletter has been provided as General Advice only. We have not considered your financial circumstances, needs or objectives and you should seek the assistance of your Adviser before you make any decision regarding this communication. We have taken care to prepare this material, but any decisions or actions you take as a result of you reading this communication are entirely your own.