Inflation – the basics

Inflation – the basics

What is it?

Inflation is a measure of the loss in purchasing power of our money. We measure the change in the purchasing power by looking at the cost goods and services relevant to a kiwi household. The CPI (consumer price index) is the official name for the measure and the basket of goods and services we measure actually changes over time.

Sorry but your well-kept compact disc of Michael Jackson is not measured anymore, but it was. They started measuring CD’s around the time they threw out cassette tapes (did not include the ones you recorded off your mate).

RBNZ and inflation

The RBNZ was the first central bank to target inflation formally. It has also been in a pioneer in the past decade for other tools and aspects of its targets. Looking back since the lates 80s when inflation targeting was introduced in NZ, inflation seems to be well tamed for the most part.

Why do we have a ton of it?

In simple terms money’s purchasing power declines as the supply of it goes up relative to what you are trying to swap it with. If there is way more money this year than the supply of bread, expect bread prices to go up.

We have a lot of money globally as we all decided to print a ton of it while at the same time cutting back on the ability to supply goods and services.

Best investment strategy with inflation?

Look I’m not an investment adviser but if money loses its value over the medium to long term, negative money shrinks. Negative money includes home loans. Some investors find it nice to take a long-term negative position with money and swapping it for houses. As money seems to increase in supply way faster than houses over the long term.

However, with inflation comes the reaction of higher interest rates, so cashflow must be structure smartly.

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