No one questioned why apples drop to the ground until Isaac Newton. And similarly, no one asks why the Reserve Bank of Australia (RBA) or Federal Reserve (Fed) tries to keep inflation at 2-3%. But you should be.
Hyperinflation is the dangerous devil that keeps the central bank, governments, and economists up at night. Hyperinflation is what happens when inflation goes out of control. Specifically, it is when the rate of inflation increases by more than 50% a month. Imagine that in the time it took to drink a cup of coffee, the price of that cup of coffee doubled. This is the scary truth of hyperinflation.
Cases of hyperinflation like that of Hungary in 1946 show the consequences of unchecked inflation. With a monthly inflation rate of 13.6 quadrillion percent, the government had to stop collecting taxes because even a day’s delay in collecting taxes would wipe out the value of the money the government collected.
Many people mix up inflation and growth but the truth is that they are complete opposites.
Consider how residential properties nationwide rose 23.7% in the December quarter of 2021. Many investors were ecstatic because of this growth in capital. But was this actually something to be happy about? Was anything done to grow the value of this asset? Has the real value of these assets actually increased?
A simple rule of thumb to keep in mind is that: if you aren’t putting in the effort to improve the value of your assets, but their value is going up, it’s inflation!
Inflation is a natural phenomenon. Like gravity, it’ll be here whether you acknowledge it or not.
20 years ago, a cup of coffee might’ve cost $1.50. Today, it’s around $4. Inflation is not always a bad thing, it can sometimes be a sign of a prospering economy, stimulating people to do better and earn better. Knowing that prices will be slightly higher in the future gives consumers the push to make purchases sooner, boosting economic activity.
If the RBA had mandated that coffee prices stayed at $1.50 back in the 2000s, coffee shop owners and staff would not be better off today. The purchasing power of that amount of money has changed!
Low, stable, and predictable inflation is good for the economy.
Excessively high inflation is on the other end of the spectrum.
It is not normal and never good. It’s when prices rise uncontrollably while value plummets. It’s greed overtaking purpose.
For example, a staff member in a Non-Profit Organisation may be paid x amount annually. Having received an offer of 2x salary from another private company, they decide to move. 3 months later, they received another offer for 3x, they move again. The employee is happy to have tripled her salary in less than a year but is anyone really benefiting?
The situation is never as simple as it seems on the surface. The NFP organisation with a tight budget won’t be able to find a similarly qualified employee on a similar budget and will have to make the tough decision between sacrificing the quality of their work or increasing their costs. The two private companies offering higher salaries were likely forced to do so because of labour shortages and will have to offload the additional cost somewhere else– likely on their consumers. Even the staff member, who may be earning more money, there is still the question of whether their purchasing power increased? This is the story of inflation, where prices rise uncontrollably and no one benefits.
And the sad truth is that Australia is currently going through one of its largest labour shortages, with inflation predicted to reach 7% by the end of the year.
Let’s talk about the interest rate, why is the RBA lifting the rate up?
When interest rates are low, people are motivated to spend more, be it buying a car with (BNPL) at an interest rate of 5% or paying for a first home at 2.5%, we want to buy more when things are cheaper.
This interest rate hike sends a clear message that it’s time for us to rationalise our spending and reconsider investment options before swiping our cards. This will hopefully slow down the market and minimise the damage to people who’ve gone into the market at the wrong time.
But we also need to be realistic about the growth vs inflation conundrum. For businesses, spending should bring value and help grow the business, there should be a pre-determined breakeven bottom line so we don’t fall into the continuous pit of raising capital and spending it carelessly, never making any profit or returning any dividends to shareholders.
RBA and FED will continue to increase rates until purpose overtakes greed and value is generated from genuine effort. Depending on how resilient our economy is, this could take months or even years. Some may never make it back to normality, just look at Sri Lanka, whose prime minister just declared the country “bankrupt”.
We’ve seen waves of inflation in the past, but this is an “inflation dragon” that has everyone concerned.
We highly recommend that you spend some time with your accountant to review your budget and cash flow regularly. With the changing economic situation, all assumptions should be tested each time the budget is revisited and reserves should be built up in anticipation of an incoming recession.
The following articles in this series will provide you with more tips and solutions on how businesses and individuals can survive the coming months. Take this challenge as an opportunity to challenge old paradigms and figure out ways to do things better.
We’ve worked closely with you throughout the Pandemic crisis, trust that we have the capability and knowledge to help you out of this financial crisis. Stick together and keep calm, we will find the way out.
Source: Harry Hoang | CEO of Tailored Accounts
With inflation at a level that hasn’t been seen since before the Global Financial Crisis following on the heels of a global pandemic, we’re living in unique times. But while we may have limited control over prices, there are still some things we can do to minimise current and upcoming financial pressures.
Tough times favour sturdy business. When economies are running hot, they can accommodate weak businesses. In this survival of the fittest scenario, only well-managed businesses, offering good-value products and services will continue to attract customers.
So here’s the big question: How can your business be more resilient and durable?
