Wealth Management and inflation

At Boutique we have been having many discussions with clients about the impact on inflation on their wealth management plans. We all know that inflation is high but has it just about peaked and what impact does this have on our everyday lives?

Our Senior Financial Adviser Damien Quirk talks about what inflation is, how it affects our daily lives, what can we do to combat it and how it can impact our Wealth Management plans.

Inflation is a term used to describe the general increase in the prices of goods and services over time. High inflation occurs when there is a rapid and sustained increase in the general price level of goods and services in an economy which is what we gave seen in Australia and particularly in Perth.

Some of the impacts of rising Inflation include

Reduced Purchasing Power:

One of the most immediate effects of high inflation is reduced purchasing power. When prices of goods and services increase rapidly, consumers need to spend more money to purchase the same amount of goods or services they could previously afford. Wages may not increase at the same rate as the prices of producst and services. If wages increase by a lesser amount, consumers may have less money to spend. This reduces their overall purchasing power, which means they may have to cut back on some essential purchases or lower their standard of living to make ends meet.

Reduced Savings:

High inflation can also affect savings. As the cost-of-living increases, consumers may have to spend more of their income on basic necessities, leaving little to save. Inflation can also make it harder to save for long-term goals, such as retirement or buying a home, as the value of savings may decrease over time due to inflation.

Income Inequality:

Inflation can exacerbate income inequality by affecting different groups of people in different ways. Those with higher incomes may be better able to absorb the increased costs of living, while those with lower incomes may struggle to make ends meet. This can widen the gap between the rich and poor, leading to greater economic and social disparities.

Reduced Investment:

High inflation can also have a negative impact on investment. Investors may be less likely to invest in an economy with high inflation, as their returns may be eroded by rising prices. This can lead to reduced investment, which can have long-term effects on economic growth.

Reduced Investment Values:

Inflation affects the values of financial investments and Wealth Management plans. Any investment paying a fixed cash amount will decline in value if interest rates rise. As inflation increases, interest rates generally rise, so higher inflation will lead to lower values for fixed-income investments, such as bonds. 

Reduced Economic Growth:

High inflation can also have a negative impact on economic growth. When prices rise rapidly, consumers may have to cut back on spending, leading to reduced demand for goods and services. This can lead to reduced production and employment, which can have a negative impact on economic growth.

Increased Debt Burden:

High inflation can also increase the burden of debt. Consumers who have borrowed money may find it more difficult to repay their loans, as the value of money may decrease over time due to inflation. This can lead to increased debt burden and financial stress for consumers which is what we have been seeing this last few months.

What’s next?

The Reserve bank recently announced that rates went up again in March, but with mixed reports on seasonally adjusted inflation figures and the impact on retail spending the jury is still out as to whether we are close to the top of the interest rate curve.

Some quick wins

  • Revisit your Financial plan and your budget to make sure you have built in enough margin for rising expenses
  • If your are savings in a normal cash account shop around to get a higher rate. Even a nominal rate of 3% is better than 1% in trying to combat the impact of inflation on cash
  • If you have debt review your rates with the bank to get the best deal.
  • Shop around for your consumables if you have time to do so – plenty of retailers are feeling the pinch so shop local and keep them in business.
  • And finally stick the course, hopefully your plans that have been put in place cater for any needed changes in spending without affecting your broad strategy.

For any advice please contact Boutique Advisers on 08 9381 8779.

Damien Quirk is a Senior Financial Adviser and has worked across the finance industry including superannuation, personal advice and the banking industry for more than 30 years. He has assisted high net worth individuals with complex financial structures right through to working with mum and dad’s and their important personal financial goals.