Inflation: Explained So Simply Even A Carny Would Understand.

This morning Claudia, the girls and I went to the show. If there is one thing that 95% of the Australian population have in common, it’s gotta be the experience of going to the show. No matter how large or small your local show is, whether it has the word ‘royal’ in the title or if it is held at the dustbowl that is your town’s showground, they all have a number of things in common. They are family events, catering for the needs of the very young with the petting zoos right up to the knitting displays for nana and her friends.

 

Every kid remembers going to the show when they were young only to be stopped from going on certain rides with minimum height allowances, or not being able to go in the dodgem cars without an adult sitting beside them. Then the next year comes around and you’ve grown enough to experience rides with g-forces that would challenge a NASA astronaut.

 

Looking back to my childhood, I can recall the rides in sideshow alley costing about 50 cents, and I remember being quite shocked when one year they were all $2 a go. This morning the cheapest rides were for children aged up to about six years and cost $5. These were for things like the jumping castle and teacups, while the big rides (you know, the ones that make you want to chunder just by looking at them) cost up to $15. It’s a great example of inflation. It’s complicated by the fact that the fanciest ride when I was a kid was the comparatively lame Cha Cha and the insurance premiums for the owners of these rides would be much more now that everybody knows about their right to sue. But I know these rides are not rising in price due to the operators suddenly increasing their spending on items like soap and toothbrushes. Because the show only comes around once a year, the effect of inflation on the rides is much more noticeable than it is for stuff you purchase more often.

 

So how do you counter the general increase in prices over time? You must ensure your income rises at least in line with the inflation rate, preferably by a little more than inflation so that by the time your income is taxed you can still keep up with those increased costs. For employees this means negotiating an annual increase in your pay. For those who are self-employed you will have to either increase the cost of your goods/services or find ways to be more efficient in producing them.

 

Inflation also needs to be considered when it comes to your savings and investments. If you keep savings stashed away under your mattress or in a jar in the cupboard, inflation will slowly erode the purchasing power of this money. The same thing will happen if you whack those savings in a bank account that pays little or no interest. With inflation currently at 2.7%, you want to make sure any return your money is earning is keeping ahead of this amount.

 

Growth assets like property and shares will produce returns well above inflation over the long term, but the ups and downs of the property and share markets can be so large as to make a vomit inducing roller coaster look as lame as the kids’ teacups ride.

 

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