Inflation vs Deflation – Where are we heading?
Unless you’ve been under a rock lately, you would have heard a lot about inflation.
Rising prices, costs of living going up, petrol, groceries, goods and services. The list goes on.
For a long time, b Invested founder Nathan Birch has been projecting that hyperinflation is just around the corner, and it could be that we’re seeing the first signs of it now. So what is it and what does it mean for property investors?
Inflation occurs when the price of goods and services rise. Just like anything else, a big part of the increase in these prices is due to the supply and demand balance. Supplies can decrease when bad weather ruins a crop of vegetables; or when a housing boom exhausts building supplies; or, in an example happening right now, the world has sanctioned a source of oil, like Russia, and suddenly the price of petrol goes through the roof at the bowser.
Inflation is often measured by the consumer price index (CPI), which is a theoretical basket of goods and services from various sectors and walks of life.
The government tracks the prices of the goods and services that make up the basket in order to get an understanding of how they are tracking against currency.
Inflation itself can be either good or bad, depending on a few factors. A total lack of inflation is bad for the economy, while the extreme opposite of hyperinflation can see whole currencies and economies collapse.
Ideally, you’re looking for a moderate amount of inflation, which encourages spending and investing, because assets hold and improve their value better than cash…which loses value every day as long as inflation is occurring.
Deflation is the opposite, meaning there are too many goods and services available and not enough cash being used to pay for them, which sees prices drop.
The flow on effect of falling prices is more unemployment, as businesses dropping their prices can’t afford as much in wages anymore; which in turn leads to more unemployed people out there without the money needed to buy goods, which then means further price drops.
Meanwhile, as prices go down, lenders revise the amount of money they will lend to manage their risk exposure. This means people can borrow less, and therefore can’t make the big purchases they might wish to, which then creates more supply of leftover goods and creates further deflation.
Eventually, the downward spiral of economic output can lead to a recession or depression.
How are we looking in 2022?
Australia is currently sitting at around 3% for inflation after a bigger than expected surge in 2021.
This figure is within what the RBA had been saying would be the target zone that would trigger a rate rise, however the central bank keeps telling us it wants to see this rate of inflation sustained for some time before it takes action.
Currently all signs point to a further increase in inflation this year, according to economists.
Chief Australia economist at BIS Oxford, Sara Hunter, says that while some elements of inflation, like soaring petrol prices, will moderate, there will still be significant upward pressure on costs.
“They’re still going to be significant in 2022 and into 2023,” she said.
Meanwhile, AMP economist Diana Mousina believes inflation has now moved from transitory to long term, citing ongoing supply chain issues and other factors.
In times of increasing inflation, Nathan Birch believes the best way forward is to turn as much of today’s cash as you can into assets that will earn you tomorrow’s dollars in rental income.
The more investment properties you have, the more you will benefit from rising rents that help you pay down your debts and build wealth.
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