Rising inflation is a leading topic in New Zealand and worldwide as central banks have been forced to raise rates. With inflation hitting a 30-year high, what will this mean for KiwiSaver funds tied to sharemarkets? And will New Zealand face a recession or a soft landing?
Insights into Inflation's Impact on KiwiSaver:
Fisher Funds chief investment officer Ashley Gardyne says these are the questions markets are trying to digest at the moment.
“The thing we are grappling with is whether the central bank action and the inflation could actually cause a recession,” says Gardyne.
One heartening sign is that long-term investors, like KiwiSaver, are not panicking in this latest round of volatility. Gardyne said that few people this time round are switching out of growth funds.
With the events unfolding in Ukraine and the rise in oil prices, the impact on consumers has shifted to whether it will impact earnings as the cost of living rises.
Yet, Sam Stubbs, CEO of Simplicity KiwiSaver Fund, is surprised that inflation is so low at a 30-year high.
But first and foremost, let's take a look at the forces behind the high inflation we are experiencing currently.
COVID-19 caused the printing of money as the largest economic countries injected cash to stimulate their economies. It has been estimated that over $10 trillion was credited into the global economy.
With that much cash available for the same goods and services, it becomes inflationary. This pressure then was made worse by the major supply chain issues so that the number of goods and services we could buy was limited.
This is noticed even by looking out to the Hauraki Gulf in Auckland; there is almost a permanent number of ships waiting to dock at the ports of Auckland, struggling to unload goods to meet the demand.
To make matters worse, the invasion of Ukraine has created a destabilising war that is inflationary, as with both World Wars, the Korean and Vietnamese and Gulf Wars.
Both Ukraine and Russia are global suppliers of oil, gas, coal, wheat, fertiliser, nickel, aluminium, platinum, palladium, and steel. Decrease the supply of these exports; prices are certain to rise.
These three factors of monetary stimulus, supply chain crisis and a destabilising war are individually inflationary causing. Together they should form a perfect storm; however, inflation for most countries is between 6-8%, numbers we last saw in the 1990s and below what we have seen prior to that.
The reason we are seeing relatively low inflation in comparison to past crises’ is our advancement in technology still allows us to produce, operate, move and manufacture goods cheaply. While central banks now have a strong track record in combating inflation that financial markets understand and respect the power of central banks and the efficiencies of competitive markets.
Looking at inflation forecasts priced into future bond and swap markets globally, the financial markets are cautiously optimistic that inflation will come under control.
But how does this all affect my KiwiSaver balance?
If inflation has increased 6.9% as of the March 2022 quarter. That means that if we were to add $10,000 to our KiwiSaver in one year’s time, that $10,000 today is actually worth $9,354.54
That may be disheartening, but at least it has not reached the height of 17.50% in the 1980s!
At any rate, forecasting needs to consider inflation. When thinking about how much money you will need during retirement. If you need $100,000 in 10 years at the current inflation you will need $100,000 + 6.9% accumulating each year = $194,884.39.
However, while the balance may fluctuate, your fund's returns should outperform inflation in the long run, to keep your tracking ahead, but you may want to reassess your finances if:
- You're in a conservative fund, and you’re still a long way from retirement
- The returns from your KiwiSaver are low, and the investments are not performing
- The fees you pay are eating away at your profits
If managing inflation for retirement or saving towards a first home feels worrying, take National Capital’s free KiwiSaver healthcheck, and we will ensure you are in the right fund.