Inflation – on the surface, it would appear at times as though you’re doing really well with investing. If the ‘wealth’ you see is increasing over time, this is great right – but have you factored in inflation?
Property has for the most part in NZ, doubled every 10 yrs in price (at least for Auckland) over the past 30-50 years. Some of this increase in price can actually be attributed to inflation – the price for almost everything increases with time.
Central Banks, including the Reserve Bank of New Zealand too, are churning out new currency at phenomenal rates right now. This is often referred to as quantitative easing or QE for short. The logic goes that, as long as it’s not permanent, this type of intervention can assist with filling up the potholes left in our economy following the pandemic.
There’s a huge difference between value and price however. With all this money printing going right now– does this really lead to an increase in value over time, or just price levels?
Inflation is also really important to consider in the context of interest rates – if they stay low, there’s no pressure or no need to increase interest rates.
In share markets, we’ve seen a sharp drop off in most indexes around mid-March but we’ve bounced back remarkably since then. Conspiracy theories are starting to mount, that perhaps the reason why Wall St is disconnected to Main St, is primarily due to quantitative easing. The money printing machine is churning out dollars but these dollars are stuck in the financial system. There could be some truth to this, but there’s also some logic in what central banks are trying to do.
If you’re an investor however, you’re justifiably concerned about this thing called inflation taking off as a result of quantitative easing. You need to generate a return on your investment, at least greater than the rate of inflation (we call this the ‘real’ rate of return). What if the currency that denominates our investments is watered down though– has our net worth really increased?
I recently sat down with the senior wealth-economist at ASB Bank, Chris Tennent Brown, to discuss:
What is inflation?
How do central banks control it?
Why ‘money printing’ may not actually generate the inflation that logically, you’d expect.
Most importantly, we going to cover what we, as everyday investors should be doing, to hedge against inflation when trying to grow wealth.
Click here listen to the podcast
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