Inflation is rising: what might this mean for super balances?
Not a day goes past without a television talking head outlining the latest reason for sharp increases in prices. These price increases are due to a variety of causes and are affecting a wide range of goods and services that you and I use.
For example, the price of cars has jumped partly because of a worldwide shortage of computer chips; housing demand has risen due to cheap loans and COVID-driven migration; and we all know about toilet-paper, with supply plummeting due to moments of irrational panic buying, and opportunistic sellers marking up the value of the few rolls left. And the list goes on as we enter the post-pandemic era.
What’s this got to do with your super? Well, our focus is on increasing the value of your super investment so you're prepared for your life after work. But as prices rise your spending power is reduced. (I’ll explain below in more detail that this is something we actively work to manage by designing most members' investment options to beat inflation, which preserves the value of your super over time.)
In school we’re taught that some inflation is good as it encourages near-term spending. Over the long-term, inflation diminishes the relative size of any loan and can increase the value of growth assets. And real assets, such as commodities and real estate, are generally viewed as having excellent inflation-protection qualities. So it’s not all bad news, though you can get that impression from the media.
Source: Australian Bureau of Statistics, FactSet
But there are two types of inflation that cause problems: hyperinflation (very high inflation) which has a severe destabilising effect on the price of goods and services, and stagflation (high-price inflation and low-wage inflation) where our ability to pay for goods and services can’t keep up with escalating costs. These types of inflation are rare and, at least for now, don’t look likely to be seen in Australia.