Inflation – you may have heard this term many times before, especially in the past few years. But what does it mean, and most importantly, what does it mean for you and your wallet?
Here are some key things to know, to help you stay in control of your financial life.

Inflation in a nutshell

Inflation is the rate at which the general price level of goods and services is rising. This means you progressively need more and more money to buy the same goods and services.

Inflation per se is not necessarily a bad thing. Many economists believe that a small amount of inflation (2-3%) can help drive economic growth. The problems start when inflation spikes, as we’ve seen in recent times.

Simply put, when prices rise fast and incomes struggle to keep up with it, people’s overall purchasing power shrinks. So, that’s one way inflation can affect your financial life: by reducing how far your budget can go.

But if you’re a mortgage holder or a personal loan borrower, there’s another way that inflation can put a strain on your wallet. To try and control rising prices, the Reserve Bank usually needs to make borrowing more expensive, and they do so by increasing interest rates. In turn, higher interest rates push up mortgage rates – which translates into higher loan repayments (which may not be until a fixed rate period expires).

So, you may be wondering…

How is the fight against inflation going?

Inflation continues to be a global problem at the moment, with central banks all over the world trying to rein it in.

While we’ve made some good progress here in New Zealand, there’s still some work to do.

According to the latest Consumer Price Index (CPI) data, inflation is slowly cooling but it’s still hovering above the RBNZ’s target range of 1-3%.

On 29 November, the Reserve Bank decided once again to hold the Official Cash Rate (OCR) at 5.5%, but they also indicated ongoing concerns about inflationary pressures. The message was clear: interest rates will likely remain high for an extended period, potentially until at least mid-2025.

While the future is unpredictable and things may always change in the meantime, it’s important to plan based on the information we have at the moment. This brings us to the next point…

Practical tips to lessen the impact on your lifestyle

How you can reduce the impact of inflation depends on your unique circumstances. But generally speaking, here are some key steps you can take to stay in control of your financial life.

• Revisit your budget with a fine-tooth comb. Budgeting is always about making your money work efficiently, no matter the environment. Make sure you prioritise essential spending such as housing, utilities, and food, and consider scaling back on luxuries or non-essential purchases.
• Debt management: With high interest rates, taking a closer look at your mortgage structure and debt repayment strategies is all the more crucial. For example, if your fixed-term mortgage rate is due to expire soon, make sure you talk to a mortgage adviser to consider options for your next move.
• Boosting income: In times of high inflation, boosting your income can help you build a much-needed buffer. If possible, consider extra income streams or seeking opportunities for career advancements.
• Reassess your investments and savings: With the purchasing power of your savings potentially losing value due to inflation, it can be vital to look at investment options that can outpace inflation. Diversifying your portfolio to include assets that historically perform well during inflationary periods can also be a wise move, depending on your needs and situation. Get in touch with your financial adviser to learn more.

Like to talk?

These are just some possible steps. For a more detailed plan, based on your situation, don’t hesitate to contact us: we can help you gain a different perspective on your financial life.

 

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.