Over the years, you may have heard us stating that low inflation, even if accompanied by low interest rates, is a good environment for retirees.
While this sounds strange, given that retirees tend to hold higher levels of cash, it is more about maintaining spending power.
A simple calculator on the RBA website can illustrate this point. It can examine inflation up to the end of 2022 over a range of time periods.
If we look at the period from 2012 to 2022, a period of historically low inflation, costs still rose. A retiree budgeting on $40,000 expenditure per year in 2012, would have needed $50,000 per annum in 2022. The rate of inflation was only 2.3% per annum over that time period.
However, if we moved the dates, say from 1972 to 1982, which was a period of very high inflation that same $40,000 budget would have blown out to $117,000 per annum 10 years later!
That period caused enormous damage to retirees’ relative wealth, plus it led to the necessity for the enormous interest rate rises required to eventually reign it in.
We have become accustomed to low inflation (apart from the past two years), but history shows high inflation can occur, and the effects can be devastating.
It is therefore important that inflation is brought back to target levels, for everyone’s sake.