May 5 2023
Investment Updates

Inflation and how it impacts your super

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You may have noticed your money isn’t buying nearly as much as it used to. From petrol to electricity, groceries and fresh vegetables, the cost of living has risen steeply. This rise in the cost of living is due to inflation. Let’s have a look at what causes it and how it can affect your super.

What’s going on with rising prices?

Inflation. Inflation measures the rate of increase in prices of a basket of everyday items over time. Or simply, the change in the cost of living over time. The most widely used measure of inflation in Australia is the Consumer Price Index (CPI). 

The Reserve Bank of Australia is responsible for keeping the rate of Australian inflation under control. The Reserve Bank uses the cash rate as one of the tools to help keep inflation within its target range of between 2% and 3% per year on average, over time. If inflation is expected to be too high, or too low, the Reserve Bank can move the cash rate up, or down, to help achieve the target.

When demand exceeds supply this can lead to inflation and rising prices.

Strong rises in inflation can be caused by many factors impacting the demand and supply of goods and services, including:

  • A strong economy and jobs market - people typically spend more money when they earn more and have a secure job.

  • Geopolitical events - the Russia-Ukraine conflict saw gas and oil prices skyrocket due to energy production shortages and the reduced supply of wheat and grain made matters worse.

  • Supply chain problems such as worker shortages, factory shutdowns, and clogged shipping routes.

  • Extreme weather events such as floods, fire and cyclones can also impact the supply of fresh produce. 

Why is inflation important?

Over time, small price increases add up. When things get more expensive, your money can’t buy as much.

To ensure the purchasing power of your super nest egg isn’t eroded over time, it is important to consider the impact of inflation.

This is one of the reasons why Rest's Core Option investment return objective is linked to the CPI.

If we use the price of takeaway coffee to illustrate the impact of inflation, then, if inflation has averaged and continues to average 2.3% per year, a cup of coffee currently costing $5 would have cost $3.97 10 years ago and will cost $6.30 in 10 years. 

How can I help protect my super from inflation?

Take the time to assess whether you’re comfortable with your investment option before you make any decisions. Over the long-term, staying invested in a well-managed and appropriately diversified investment option may help protect the purchasing power of your super against inflation.

At Rest, we offer a range of diversified options - each with varying risk profiles and many with investment objectives set as a percentage above the rate of inflation. Our aim for your super isn’t just to keep pace with the increase in the cost of living, but to grow your super above it. We aim to achieve this by investing in growth assets like listed shares and private equity which have the potential to outperform inflation over the long-term, as well as unlisted investments such as unlisted property, unlisted infrastructure and agriculture - all of which have features that can help protect against the impacts of inflation.

Understanding inflation and its impact on your super increases the likelihood of having a more comfortable lifestyle in retirement.   

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