NewsBite

Inflation pain deepening, especially for have nots

A nasty new edge to the pain of inflation has emerged in recent years, widening the gap between the haves and the have nots.

The rising cost of goods and services is a constant scourge, gnawing away at people’s incomes and wealth. Picture: Matthew Horwood/Getty Images
The rising cost of goods and services is a constant scourge, gnawing away at people’s incomes and wealth. Picture: Matthew Horwood/Getty Images

Inflation is theft, plain and simple.

Whether you started the year with $100 or $100,000 in the bank, after a year of, say, 10 per cent inflation, it’s exactly as if somebody has stolen $10 from the first and $10,000 from the second.

If that’s not bad enough, the tax system further twists the screw - bracket creep.

Giving everybody a 10 per cent wage or salary increase will leave them behind.

Their after-tax incomes would grow by less than the 10 per cent rise in their costs.

In short, any savings you have are devalued; and your after-tax incomes also will fail to keep pace with the rising prices.

Even when inflation is ‘just’, say, 2-3 per cent; it is still gnawing away, like a persistent rat, at both savings and the real spending power of incomes.

Ten years of ‘just’ 3 per cent inflation will reduce the $100 to $74, the $100,000 to $74,000.

And you will have needed somewhere between a 40 per cent and 50 per cent total increase in your income - depending on your marginal tax rate - just to stand still, so far as your buying power was concerned.

So why do we even accept a 3 per cent regular inflation outcome? Or, more exactly, the 2.5 per cent mid-point of the Reserve Bank’s 2-3 per cent target range?

Because of argued trade-offs; that trying to get inflation to zero, and keeping it there, would cost too much in terms of business failures and job losses.

A ‘little bit of inflation’ (supposedly) works like grease in the engine of the economy.

It also works far too nicely for incumbent politicians, thanks to the bracket creep pouring more money into the budget than the pace at which budget outlays grow.

At least initially. As you postpone the added spending needed into the never-never mañana (at least, beyond the four-year budget time horizons) future.

The evil, and straight-out pain, of inflation is the most basic lesson - in the interest of the most basic self-protection - that every generation has to learn.

Especially this one, after we’ve just had 20 years of ‘just’ 2-3 per cent inflation.

Why, otherwise, seemingly, intelligent people got fussed when we had a few years of inflation, just, below 2 per cent, defies logic, and intelligence, by the bye.

There’s a relatively new twist to the inflation story, which adds a really quite nasty edge.

It’s the way asset values - shares and property, but especially property - have persistently and significantly risen faster than inflation.

A dynamic which has been aggravated by a number of factors (that would require another column) in recent years.

At its simplest, it means than if you start what might be termed your ‘life-time inflation journey’, say, at 20, owning especially property, you will have some to a lot of protection against inflation.

You will even benefit as there is a positive feedback loop between goods and services inflation and asset values.

The nasty edge is the way asset owners get richer and the asset-impoverished get poorer. And the system whacks the latter even further.

Add your comment to this story

To join the conversation, please Don't have an account? Register

Join the conversation, you are commenting as Logout

Original URL: https://www.heraldsun.com.au/business/inflation-pain-deepening-especially-for-have-nots/news-story/a36af90518b713ab19d1b2b57770f9d0