The annual Consumer Price Index (CPI) in Australia rose 3.0% in 2021. This is one of the highest rates in over five years.
The rising inflation and high-interest rates are driving up the cost of living and putting people’s wealth at risk. From grocery store items to holiday gifts to plane tickets, and more, consumers are being forced to deal with high prices.
On the other hand, since inflation erodes buying power, investors have to make tough decisions and adjustments to ensure they protect their investments.
Read on to know high inflation could cost you and what to do about it.
Inflation is essentially not good or bad. When kept in check, is the sign of a healthy economy and keeps people spending their money rather than storing it away.
However, when the rates are too high, consumers will spend more to get the same goods and services. This can also undermine economic recovery.
Usually, inflation is caused by challenges in supply, brought about by factors such as high production costs or an increase in demand. Note that, inflation is not a physical phenomenon. It is an idea backed by experts who also rely on research and indexes to determine the rate.
Though the central bank had predicted that the rate would not get to 2% until mid-2023 and cash rates would also remain as low as 0.1% until 2024, the economic effects of the COVID-19 pandemic have fueled the change.
Because of the pandemic, there has been an increase in the demand for goods while the supply side is experiencing shortages. Companies haven’t been able to maintain their production levels owing to lockdowns and supply chain disruptions.
However, this does not indicate that there is a cycle of rising inflation. There is still a lot that the government can do to fight it.
How to Handle Inflation
While the cost-of-to-day living keeps going up, there is no need to get worried just yet. What you see is mostly the expected and normal response to the effects of the stalled-out pandemic economy.
Meanwhile, as you wait for the CPI to go down, there are a lot of things you can do to combat inflation. Whether or not you have a pay increase or an extra source of income, here are some things that you should consider doing.
It may be impossible to predict the impact of inflation on your investment. However, one thing that investors can expect to happen is that it will lower the value of long-term bonds.
This is what usually pays a fixed income amount each year. High inflation shows that the fixed amount does not go far. Nonetheless, if you’re a younger Gen X, millennial, or Gen Z investor, do not worry so much about the short–term impacts.
Consider sticking to your current investment plan, especially if it’s stock-heavy. Stocks can offer a reliable hedge against inflation because they can generate even greater returns.
If you’re a long-term investor, it may be a good idea to diversify your investment. This way, you may be able to maintain your purchasing power over a long period of time.
In that case, consider your time horizon, risk tolerance, expenses, and income. If you’re a Muslim living in Australia, consider investing in an Islamically compliant government-registered superannuation fund.
Such organizations help Muslims invest in the right companies that promote Islamic investment principles and this will ensure that your retirement funds remain halal.
Note that without halal investing guides, you may end up investing in companies that produce or market products such as adult materials, tobacco, weapons, alcohol, and other activities that are considered socially harmful by Islamic investment principles.
2. Suspend Big-Ticket Purchases
Despite the inflation, not everything has gotten more expensive. There are prices hikes that can be temporary and it may pay to hold out. It is ideal to defer unnecessary purchases.
For example, postpone buying a used car or truck until the prices start to retreat. The chip shortage, which largely contributed to price hikes, may improve toward the end of 2021 or early 2022. When this happens, car prices could reduce.
Equally, since the rising demand for home improvement and supply-chain slowdowns caused the prices of building supplies such as copper, gypsum, steel, and lumber to hit record highs, it would be best to cancel any remodeling plans until it is more affordable.
If you have to buy something, consider using your emergency fund. This will help you avoid using your credit cards or incurring any other high-interest debt.
3. Make Payments on Your Home Buying Plans
Suppose you have plans to buy a home and it is costing you rent or mortgage. In that case, it would be best if you make a lump-sum payment or increase your regular purchase payment.
In the long run, this will save you money and will allow you to become a full homeowner much faster. When you do this, you will put to good use the money that would have otherwise lost its purchasing power during inflation.
4. Negotiate Lower Prices on Consumer Goods
Rising inflation doesn’t have the same impact on every consumer. Households have different consumption habits. The size of your family, lifestyle, and income will determine your inflation rate.
You may have to pay more for hotels, airline tickets, clothing, furniture, car rental, and day-to-day essentials such as gas, electricity, and groceries. What this means is that your paycheck may be stretched too thin.
Unless your wages are also increasing, which is not the case for many people, you may need to find an extra source of income and negotiate the best deal on all products and services.
To do this, start by asking for discounts or deals. In addition, try to negotiate prices on gym memberships and insurance premiums.
Calling service providers and asking for a lower rate will minimize your monthly expenses and save you some money if you’re offered a discount. If a seller or lender is not ready to lower their prices, consider other options.
For example, if you have to buy a used car, ask the dealer to include a free oil change every year. Though you will still have to pay a lot more to buy the car, you will save the few hundred dollars you’d have spent on oil changes.
Members of Islamic super funds can take advantage of the benefits of being a member and get discounted tickets to celebrate Eid or win a trip to Mecca for Umrah.
Remember, while factors such as supply shortages may ease in the near future, other factors such as the high level of consumer demand point to a prolonged trend.
5. Increase Your Income During Inflation
Rising inflation negatively affects your salary’s purchasing power. Because of this, your income also needs to rise to accommodate for inflation. If asking for a raise is not the right move, try to consider other sources of income.
If your talent is in demand, you may have a higher negotiating power or higher chance of landing a second job. Suppose you don’t get a raise in your current workplace, consider looking for a higher-paying job in other companies.
In case you receive a higher salary offer, you can either take that job or use it to negotiate increment with your current HR. Remember, this may work if your talent is in demand.
Whether you get a second job, get a raise at your current job, or take up an offer from another company, it may be best if you look beyond a year. Rising inflation is likely to stay for a year or more, so your income should rise as well.
6. Tap Your Savings Account Wisely
Though interest rates on saving accounts are increasing, it is not the best time to move the money around.
Your savings are not meant to make you rich; they are designed to give you a financial cushion when you need one and have no alternative.
If you have more cash than you need in your savings or emergency account, it would be best if you considered investing some of it.
Islamic investment super funds offer a variety of investment options with a perfect balance of income and long-term capital growth.
Such options can put your money into good use and open your funds to various opportunities in domestic and global markets while still observing Islamic investment standards.
Consider These Options with Rising Inflation
Several economists and industry experts believe that though temporary, inflation can persist for several years. Therefore, to meet the high cost of living, re-evaluate your expenditure and know how to combat it.
Are you looking for a way to deal with rising inflation? We have one of the best solutions for you. At Crescent Wealth, we offer all Australians the opportunity to invest their super in accordance with Islamic investment principles.
Our investment options will help you put your money into good use. If you have any questions or would like to speak to our experts, contact us today.
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Chief Investment Officer
Strategic leader with 19 years of industry experience and over 7 years in executive and senior management positions leading small to medium sized multi-functional operations in the funds management and superannuation industry. A record of delivering outstanding investment outcomes for members and a proven track record in driving member engagement through investment education and insights.