Inflation has reared its head in 2022 and continues to remain a concern for 2023.
Inflation is a measure of the rate at which the general level of prices for goods and services is rising and subsequently, purchasing power is falling. Inflation can have a significant impact on the financial well-being of households or retirees who may have fixed incomes. Over time the same amount of money will not be able to purchase as much as it could in the past.
If inflation is running at a rate of 2% per year, the purchasing power of cash holdings or a retiree’s fixed income will decline by about 20% over the course of a decade. However, if inflation is left unchecked and not brought under control then the outcomes can be very damaging as shown below. Persistent inflation at the 7% level will effectively turn $1,000,000 into $500,000 over 10 years!
| Capital in 2022 | Annual Inflation Rate | Present Value after 10 years |
| $1,000,000 | 1% | $905,286 |
| $1,000,000 | 2% | $820,348 |
| $1,000,000 | 3% | $744,093 |
| $1,000,000 | 4% | $675,564 |
| $1,000,000 | 5% | $613,913 |
| $1,000,000 | 6% | $558,394 |
| $1,000,000 | 7% | $508,349 |
Inflation can also lead to uncertainty, which can make it difficult to plan for the future. If you don’t know how much money you will need to cover your expenses, it can be very difficult to conduct any detailed planning or budgeting.
Anyone involved in building over the past 2-3 years ( whether as a tradesperson or as a customer) will attest to how the constantly increasing costs of materials have been a nightmare for planning.
Unless Australia (and the world) is able to get inflation down quickly, many of us will be unable to afford tickets to the Brisbane Olympics!