What is Inflation and What To Do?

3 Key takeaways:

• What is Inflation
• Why home loan interest rates go up
• What can you do to reduce the impact

For those of us in the current economic environment, we would all be too familiar with the word “inflation”. Many of us have heard of the word, however, truly don’t understand the meaning.

The technical definition is “a general increase in prices and fall in the purchasing value of money” In plain English, the cost of everything is going up. Rent, utilities, fuel, and groceries to name a few.

Sounds simple enough, but the question really should be, how does inflation interact with home loan interest rate and why are rates going up?

Currently, the RBA has increased rates by a total of 7 times over consecutive months. This has led to home loan rates ballooning past 5%, from a record low of 1.85% earlier in the year. In simple terms, the amount of interest (cost to the consumer for borrowing money) has almost tripled in just over half a year.

So many Australians would naturally ask the question, why are interest rates going up? How is that helping me? A very good question. The answer is due to the economy running too hot. A build-up of government stimulus, tax cuts and savings that people accrued during lockdown. Combined the Ukraine-Russia war has essentially formulated an environment where there is simply too much money in the consumer’s hands and not enough available goods and services due to global supply issues. The only way for Australians to stop spending (and cool the economy) is to unfortunately force them to allocate extra funds into home loans and debts. This essentially means there is less money going into goods and services, resulting in a slowdown in spending which would relieve the stress on supplies.

**Now the next question is “What can I do”. **

• Review your home loan rates to ensure you are getting the best deal
• Review your budget to tighten up splurging and entertainment
• Review your outgoing to ensure you are not paying too much – phone, utilities, insurance providers

Now for the good news. Inflation is part of the overall economic process and will past. If history has shown us anything, its that these challenging moments are far and few between (last inflation was back in the 80s).

If you would like to know more, feel free to talk to our financial planners and advisors who service the Yarraville, Seddon, Altona and Williamstown areas.