What exactly is inflation and how does it affect everything?

More than likely you’ve heard about the rising cost of living and the impact inflation is having on the economy, but what exactly is inflation and what impact does it have on your everyday life? 

Inflation is defined as the rate at which the value of money is falling and, therefore, the general level of prices for goods and services is rising.  While inflation is generally viewed as a negative thing, a little of it can actually be healthy for stimulating an economy as it boosts consumer demand and consumption and drives economic growth.

The latest annualised inflation rate is 6.9% which is the highest it’s been since 1990. This means the cost of living is increasing and things like your weekly shop, technology, and other consumables are costing more. Basically our dollar is worth less, so goods cost more to buy. 

The thing that causes issues for the average Kiwi is when inflation outstrips incomes as its currently doing for many kiwis. When the prices of goods and services are rising, faster than salaries and benefits the household budget becomes stretched. This has can have a significant  impact on what people can spend and do. From a property sense, this can then have an impact on how much people can spend on mortgage repayments or how much they can afford to save for their property deposit. 

So what can you do to mitigate the effects of inflation? While you can’t avoid it, you can help plan for it. Cutting back on unnecessary spending is a big one, as well as putting into place household budgets. Due to the shortages of staff, it could also be the right time to ask for that pay rise from your boss. If you haven’t taken a look at your mortgage in a while, it might be a good idea to check in with your mortgage advisor to ensure your mortgage is still structured correctly and you are benefiting from the best rates. 

While a little inflation can be a good thing, and even necessary at times, it can also get out of hand as we are seeing at the moment and it’s the Reserve Bank’s job to monitor inflation and keep it under control. Their main tool for this is the OCR (official cash rate), which is predicted to continue rising to combat inflation and this pushed interest rates up which piles even more pressure on household budgets. Unfortunately most commentators predict that things may get worse before they get better in terms of the cost of living and rising interest rates.

If you are feeling the pinch and are wondering if there’s any way you can save money on your home loan, then get in touch and we can assess your loan for any potential savings.