Inflation: Slowly Deflating Your Worries (and Interest Rates!)
Kia ora everyone! Let’s talk about inflation, that pesky buzzword that’s been clinging to our wallets like gum to a shoe. We all know the feeling – groceries costing a bit more, that dream vacation seeming further away.
But here’s the good news about inflation
While still a concern, is showing signs of simmering down. As the Senior Economist from Westpac NZ put it just this week:
“Recent months have seen inflation dropping back and related easing in interest rate pressure”
The sticky is finally becoming unstuck!
Inflation is just hot air
Imagine inflation as a hot air balloon. It’s been steadily rising, carrying the prices of goods and services along for the ride. But recently, we’ve seen some air slowly leak out. This doesn’t mean the balloon is flat on the ground just yet, but it’s definitely losing altitude.
Now, why is this inflation balloon deflating?
A few reasons are at play. Supply chains, once kinked like a garden hose, are slowly untangling. This means businesses are getting the things they need to make products, which helps keep prices in check. Additionally, oil prices, a major driver of inflation, have come down from their highs.
Central Banks (in NZ, that’s the Reserve Bank) have been cranking up interest rates since things got out of control post the tidal wave of money flowing into our economies to ride us through the crazy times of covid. That had a knock-on effect to mortgage costs going through the roof, and hey presto, we’ve all slowly stopped buying that TV, new car, or ‘nice-to-have’. Albeit a long-drawn-out process, it is happening.
We are stopping spending, and that ‘stopping’ is gaining momentum for economies around the world as loans cost more and more to service. Quite simply, we are relocating our spare dollars to pay debt, not buy unessential stuff.
Here’s the exciting part: as inflation cools, interest rates, currently perched at a watchful hawk-like position, are likely to follow suit. Think of interest rates as the leash on inflation. When inflation gets too frisky, central banks like the Reserve Bank of New Zealand (RBNZ) raise interest rates to slow things down. But with inflation hopefully becoming less of a beast, the RBNZ might loosen the leash a bit, lowering interest rates. “When will this be?” I hear you shout? We hope later this year! WE HOPE!
So, what does this mean for your money?
Here’s where things get interesting. When interest rates drop, it generally makes growth assets like shares (stocks), property, and cryptocurrencies more attractive.
Let’s unpack why:
- Shares: Companies are businesses and businesses like low-interest rates. Why? Because borrowing money becomes cheaper, it can fuel growth and potentially lead to higher profits. Investors, anticipating these higher profits, might be more willing to buy shares, pushing their prices up.
- Property: FOMO (fear of missing out) will kick in as debt becomes cheaper and once again the news agencies blast from the rooftops how undersupplied our country is for property.
- Cryptocurrency: This is a bit more speculative, but some investors view crypto as a hedge against inflation, similar to gold. So, if inflation is on the decline, the allure of crypto as an inflation-fighting asset might cool down a bit, potentially leading some investors to shift their focus to shares. However, with more liquidity entering the market, more money is likely to find its way to this asset class regardless.
Hold on, should I be rushing out to buy all the shares?
Not so fast, there! While the outlook seems positive for growth assets, it’s important to remember this: investing is a marathon, not a sprint. Don’t make any knee-jerk reactions based on short-term trends.
Here’s what I recommend:
- Stay diversified: Don’t put all your eggs in one basket. A healthy investment portfolio should include a mix of assets, including growth assets like shares, property, commodities, and crypto, but also more stable options like bonds and cash.
- Consider your goals: Are you saving for retirement in 20 years? Or a house deposit next year? Your investment timeline plays a big role in your strategy. Growth assets tend to be more volatile (meaning their prices can swing up and down more dramatically), so if you need your money soon, you might want to prioritize stability.
- Talk to a professional: This is where your friendly neighbourhood financial adviser comes in (that’s me!). We can chat about your specific situation, risk tolerance, and goals, and craft an investment plan that’s right for you.
The bottom line for inflation?
Inflation might still be a bit of a nuisance, but it seems to be losing its grip.
This could lead to lower interest rates and a potential boost for growth assets.
But remember, investing is a long-term game. Stay calm, stay diversified, and seek professional advice to navigate the exciting, but sometimes bumpy, world of finance.
And the bottom bottom line? Anyone buying growth assets now is likely getting in ahead of the curve. Remember, once interest rates pivot, liquidity or money flows back into the economy – And guess where that money ends up? Yup: Growth assets: Shares, Property, Crypto!
Invest wisely my friend!
Daniel Carney
Financial Adviser
Goodlife Financial Advice