WHY INFLANTION IS
ERODING YOUR SAVING
The basic principle
behind inflation is that as the money supply increases, so too does the
relative price of goods and services. A common sentiment for children to hold is “why can’t we
all be millionaires, then there would be no poor people”, or something to that effect. The answer is inflation. In
theory we could all be
millionaires, but this would drive up the price of consumer goods to
reflect the increase in money supply, essentially balancing out society’s new found
wealth
The above scenario is an
example of hyper-inflation, where prices rise in an exceedingly rapid
fashion. In reality, most modern countries with stable, or fairly stable, economies have an inflation rate in
the low single digits. When using New Zealand as an example, we have recorded an inflation rate
of a little below three percent since the turn of the century, never
veering too far from that mark in any one year. For the average citizen what
this means is that as the amount of New Zealand currency increases by three
percent annually, the price of goods and services follow in order to keep pace.
In essence, you would have to
be earning three percent or more in additional income each year in order to
avoid a decrease in your buying power.
The example of wage
parity shares a common connection with how savings are affected by changes in
inflation. Your
savings must also increase at the same rate of inflation each year in order
hold their real worth. If
prices are rising annually but your savings remain unchanged, you are able to purchase less with
the same amount as you were the previous year. This is why keeping your savings hidden under a
mattress is not the smartest investment strategy, even if you ignore the security issues.
What the vast majority of us do instead is deposit our savings into the bank.
Banks have made for sound
investments, seeing as the deposit rate has traditionally been above
the inflation rate, atleast in New Zealand. This means that your savings are growing faster
than inflation, effectively increasing the value of your deposit within the
marketplace. The problem is, following an increase in GST, inflation has risen above the
interest rates offered by banks. It is still a far safer investment than
storing cash under your mattress, but not as secure as it once was.
Modern investors need to
more carefully consider their options when structuring a portfolio. Of
course the key advantage of a bank is that you don’t risk losing your
investment, but if your value
is being eroded from year to year
then
you have to ask yourself what
the point is. The best thing to do is speak to an Investment Adviser, who can help sort through your
options and minimise the impact of inflation upon your savings.
1.
The basic principle behind inflation is that as
the money supply increases, so too does the relative price of goods and
services (Simple Present Tense)
2. A common sentiment for children to hold is “why
can’t we all be millionaires (Simple
Present Tense)
3.
There would be no poor people”(Past Future Tense)
4.
The answer is inflation (Simple Present Tense)
5.
We could all be millionaires (Simple Past Tense)
6.
The above scenario is an example of
hyper-inflation (Simple Present Tense)
7. Economies have an inflation rate in the low
single digits (Simple Present Tense)
8. We have recorded an inflation rate of a little
below three percent since the turn of the century (Present Perfect Tense)
9. You would have to be earning three percent or
more in additional income each year in order to avoid a decrease in your buying
power (Past Future Tense)
10. The
example of wage parity shares a common connection with how savings are affected
by changes in inflation (Simple Present
Tense)
11. Your
savings must also increase at the same rate of inflation each year in order
hold their real worth (Simple Present
Tense)
12. If
prices are rising annually but your savings remain unchanged (Present Continuous Tense)
13. You are
able to purchase less with the same amount as you were the previous year (Simple Present Tense)
14. This is
why keeping your savings hidden under a mattress is not the smartest investment
strategy (Present Continuous Tense)
15. If you
ignore the security issues (Simple
Present Tense)
16. Banks
have made for sound investments (Present
Perfect Tense)
17. Your
savings are growing (Present Continuous)
18. Inflation
has risen above the interest rates offered by banks (Present Perfect Tense)
19. Modern
investors need to more carefully consider their options when structuring a
portfolio (Simple Present Tense)
20. If your
value is being eroded from year to year (Present Continuous Tense Passive)
21. You
have to ask yourself what the point is
(Simple Present Tense)
22. Who can
help sort through your options and minimise the impact of inflation upon your
savings ( Simple Present Tense).
