What is Inflation?
Simply put, it is an increase in the cost of goods, materials or labour.
You can see inflation in anything from a litre of milk to house prices. The most noticeable at the moment (August 2021) is in construction prices for building and renovating houses.
How does it happen?
Inflation increases usually from a shortage of good/material/service or increase in demand. As lockdowns are eased, the economy opens up and there is a sharp increase in demand for goods and materials (eg timber for construction) as construction restarts and consumers start spending.
Is the inflation increase expected to be temporary or permanent?
Most economists expect the spike in inflation to be temporary, but normal levels of inflation at 2% (approx) to resume in 12 to 18 months.
What does it mean for you?
Your money doesn’t go as far. You earn the same amount but goods/services are more expensive.
House prices have reflected inflation as prices are near all time highs.
What does it mean for investors?
Persistent inflation means central banks will raise interest rates. Deposit savers probably won’t see this passed on by banks.
Persistent inflation above 4% is bad for stock markets but this is unlikely to materialise.
Residential property remain elevated for a number of years.
Alternative assets – sharp spike in commodities which will abate as demand normalises.
Crypto currency – seen as alternative to monetary system and inflation hedge – likely valuation increase.