While cash is often viewed as a safe haven, from a purchasing power perspective it is one of the riskiest asset classes around. The reason for this centres around inflation and the impact this has on the spending power of your savings.
Inflation can have a significant impact on the spending power of your savings
From a savings perspective, inflation is one of your greatest enemies. While it is easy to see the impact of rising prices on your day to day spending – just take a look at your latest grocery bill – the impact of inflation on your savings is harder to see.
Inflation is a silent killer when it comes to savings. Over time, it is one of the biggest destroyers of wealth, slowly and silently eroding the spending power of your money.
Over the last 50 years, inflation has averaged 5.5 per cent per annum in New Zealand and has seen the purchasing power of a dollar decline by 93 per cent. This means the spending power of $1,000 tucked under your mattress in 1973 would be equivalent to just $67 today.
Thinking about this in reverse, you would need $14,870 today to buy what $1,000 did in 1973. In order for your savings to have kept pace with inflation, the average after-tax return you needed to achieve over this period would have been 5.5 per cent per annum, anything less and the spending power of your savings will have gone backwards.
Unfortunately, over this period the return on cash (we have used 6-month term deposits as a proxy for cash) has lagged inflation. Even though cash would have provided an average after tax return of 4.8 per cent per annum over this period, the spending power of your savings went backwards.
Even during more benign inflation periods such as the last 20 years where inflation has averaged 2.5 per cent per annum, the compounded impact this can have on the spending power of your money is still significant.
Even at more modest levels, inflation can have a significant impact on the spending power of your money
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Michelle Perkins
Senior Research Analyst (Portfolio Strategy)
Market Insights enewsletter
Keep up to date with our fortnightly Market Insights enewsletter. Our research team provide timely and regular commentary and analysis on market developments, understanding investment jargon, and the impact of current events.