Learning about inflation
Trish Oakley
December 2023
Pushing the trolley around the supermarket is one of those jobs you either love or hate. And regardless of whether you opt for the in-person or online experience, there is still that moment where you reach the checkout and they say, “That will be $x”. I don’t know about you but I find myself more often than not asking myself “Really? Can it possibly cost that much?" The grocery shop is a clear reminder of the forces of inflation.
As my kids were growing up, I used this weekly outing as an educational exercise. There were lessons around reading labels carefully, understanding how specials work, guessing how much the trolley would cost and finally in the car on the way home, reviewing the receipt was an exercise in picking out the cheapest and most expensive item alongside that which surprised them most around the actual cost. Financial literacy has always been a thing in my house and I have sought ways to bring it into every day conversations. Now of course it’s been the perfect way to explore the concept of inflation and lead into some of the themes around what has driven that.
Incorporating the language of money into our daily lives is important to explain the world around us. I see there being so many opportunities to do just that with our children and grandchildren. A recent research report* released noted that: “while 82% reported they were financially confident, just 62% demonstrated a ‘good understanding’ when asked about four financial concept trivia questions to measure literacy”.
One of the four concepts tested asked: “Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After one year, would you be able to buy more than today, exactly the same as today, or less than today with the money in this account? Only 58% overall were able to answer this question correctly (the correct answer is less).
Understanding inflation and how to manage within this construct is something we haven’t had to pay much attention to in recent decades while inflation has been low and stable. If you were pushing that grocery trolley around in the 70’s or 80’s, inflation was often running at an annual rate of over 15%. That of course is a day or two ago so it is little wonder that for some, the concept of inflation is not well understood. Examining the real (inflation adjusted) purchasing power of your money is an important thing to be aware of.
Junctures like we face now, or the geopolitical events playing out offshore and their resultant impacts on economies, provide opportunities for us to engage with and understand financial drivers and how they impact on our everyday lives and investments.
Forsyth Barr understands this and has recently completed its own financial literacy initiative called “Forsyth Barr Investing Lab”. Across our 25 offices and nearly 600 staff, we have wonderfully skilled people in their areas of expertise but not all are directly involved in the investing process. Investing Lab provided the chance to explore different foundational financial concepts alongside macro-economic themes. Feedback has been very positive and staff have been able to test their own knowledge along the way. We are now rolling this out on a complimentary basis to organisations wanting to do the same for their employees in 2024.
In the meantime, as you kick back into hopefully a long and relaxing summer holiday with friends and family there is the chance for everyday conversations. Like any language we learn, it is often the day to day topics we start with. In the case of money, that can be about the price of groceries for the BBQ catch up or the cost of filling up your car at the petrol station ahead of those road trip adventures. What interest rate you are paying on your mortgage through to how your KiwiSaver account has performed during the year and what type of fund you are in. It takes time and practice to become fluent. Mistakes along the way and associated faux pas are one thing when practising your French or German but not something you want to do with money so alongside these informal discussions, I would always encourage dialogue with your support networks prior to making any significant decisions or changes to your arrangements. This in my opinion should include your financial adviser and mortgage broker where applicable.
Enjoy a relaxing and happy festive season ahead….and don’t forget, use those everyday moments to create a community of fluent, financially literate speakers amongst your friends and family.
*Financial Services Council NZ, Money and You, The Perception Gap
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