New Zealand's inflation rate has hovered around 2 percent for most of this century, but experts say it could reach 7 percent this year.
Financial journalist Mary Holm offers some advice for people worried about how to secure their money in the face of rising inflation and wobbly sharemarkets.
Photo: Thomas Lefebvre / Unsplash
Listen to Mary Holm on Afternoons
Since the late 1960s, inflation and interest rates have tended to move together, Mary tells Jesse Mulligan.
"As one goes up, the other tends to go up.”
From that time to the late 1980s, the inflation rate also tended to be higher than the bank's term-deposit rates, she says.
“While they were both going up together, inflation was higher than interest rates.”
Yet even when interest rates were as high as 18 per cent, she says people trying to save money found themselves going backwards.
“Even though if you put $100 in the bank at the beginning of the year and got $118 out at the end it sounds super. But in fact, your $118 bought you less at the end of the year than your $100 did at the beginning of the year because inflation was even higher, which is sort of quite astonishing.”
In the 1990s, the inflation rate was brought down significantly and interest rates tracked slightly higher, Mary says.
“So while interest rates were much, much lower than they were back in the ‘80s, they were above inflation and therefore people did better in banks than they were [before] because the money could buy more at the end of the year them at the beginning of it.”
Although it's impossible to say for sure, interest rates are now likely to rise above inflation once more, she says.
“In the last 10 or 20 years, people with mortgages have been the winners, and the people with money in the bank have been losers.
“And that could change a bit with all three going up; bank deposit rates, mortgage rates and inflation all going up.”
People concerned about rising inflation should invest their money in shares or property, Mary says.
“I've got some really neat graphs that go for the whole of the 20th century from 1900 to 2000, researchers looked at inflation and shares. It's American data, but much the same sort of thing was happening in New Zealand.
“They show that if you put $1 in the sharemarket in 1900, 100 years later you had nearly $17,000.”
Taking into account inflation, $1 in 1900 is now worth $710, she says.
“When you look at bonds, they grew much, much less. The dollar in bonds grew from $1 to $5 after inflation is taken out of it, whereas shares grew to $710.
When inflation is rising, t's really a good idea to invest your savings into shares and property, Mary says.
"Those are the two assets that grow faster than inflation, they always have. And they always will because there's logic behind it.”
This is because as input costs rise, companies increase their price to customers.
“So the value of the company continues to grow with inflation and faster than inflation over the long term.
“Shares are the way to go if you're worried about inflation.”
For most Kiwis, this means enrolling in the higher-risk Kiwisaver funds, she says.
“[I recommend] moving to either a growth fund or an aggressive fund, which are the funds that hold largely shares.
“This is long-term stuff we're talking about. If you've got more than 10 years before you're going to spend the money, it's a really good idea to get it into one of those higher-risk KiwiSaver funds.”
Even retired people might consider putting part of their savings into a higher-risk Kiwisaver fund as a hedge against inflation, Mary says.
“People still don't realise that you don't have to be under 65 anymore, anyone of any age can join [Kiwisaver]. And while people over 65 don't get money from the government and usually don't get employer money, it's still a good place for you to be putting your long-term money.”