Investments that have outpaced inflation
Inflation plays a key role in the Reserve Bank of Australia's (RBA's) cash rate decisions. That's left many Australians on tenterhooks each month, waiting to see how inflation is tracking, and as a consequence, whether we could face an increase in our home loan interest rate.
This level of engagement with inflation is relatively new. As the chart below shows, inflation (as measured by the Consumer Price Index) poked along - mostly between the RBA's target range of 2%-3% - for many years.
This all changed with the COVID pandemic. There are a variety of reasons why inflation dramatically plunged, and later soared to 7.8% in late 2022. That's a story for another day.
What matters right now, is that inflation is still high, currently sitting at 3.8%. This has important implications for all Australians, including investors.
Change in Consumer Price Index 2014 to 2024
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Source: Australian Bureau of Statistics
Inflation has the potential to erode personal wealth
We've all felt the direct impact of inflation either through a cost-of-living crunch or higher mortgage repayments.
What's less obvious is the way inflation can damage our personal wealth.
Cash stashed in a savings account, for instance, will earn interest. But inflation steadily reduces how much that money will buy.
We saw a textbook example of this in 2022. If you had $10,000 in a savings account at the start of the year, the balance would still be $10,000 at the end of the year. The difference is that the purchasing power of your money would have declined by 7.8%. In other words, you'd need to spend more to buy the same goods and services.
Looked at this way, it's easy to see how, left unchecked, inflation has the potential to white ant the quality of our lifestyles.
The asset classes that have outpaced inflation
There is a tried and tested way for investors to beat inflation and that's to invest in 'growth' assets whose capital value increases over time.
The question is, which investments have outpaced inflation? Research by InvestSMART provides the answers.
Analysis by InvestSMART reveals that over the 12 months to 30 June 2024, international shares notched up gains of 19.92%. As inflation is currently 3.8%, global equities beat inflation by an impressive 16.12%.
Australian equities were another inflation-fighter, returning 12.1% over the year to outpace inflation by 8.3%.
Listed property trusts (REITS) landed returns of 23.79%, eclipsing inflation by 19.99%.
At the other end of the scale, savings accounts earned a typical return of 4.50%. After we allow for inflation, that return comes down to a pretty meagre 0.7%.
Asset class returns v inflation: 1 July 2023 - 30 June 2024
Inflation
|
Cash (savings accounts |
Australian bonds
|
Australian shares
|
International shares
|
Property (REITS)
|
Commodities
|
3.8%
|
4.50%
|
3.68%
|
12.10%
|
19.92%
|
23.79%
|
9.78%
|
Outperformance |
0.7% |
-0.12% |
8.30% |
16.12% |
19.99% |
5.98% |
ETFs - a simple option for an inflation-beating portfolio
Of course, it's easy to say that Aussie shares beat inflation by 8.3%. But with more than 2,200 securities listed on the ASX investors may be uncertain about which stocks to buy into.
Fortunately, there is an easy option that doesn't involve poring over company reports to decide what to invest in.
The table below shows how exchange-traded funds (ETFs) representing the major asset classes have outpaced inflation over the past 12 months. The good news is that almost all the ETFs shown have beaten inflation with near-double-digit results.
ETFs that have outperformed inflation: 1 July 2023 - 30 June 2024
Inflation |
Vanguard Australian |
iShares Core S&P/ASX 200 (IOZ) |
Vanguard MSCI Index International Shares ETF (VGS) |
Vanguard Ethically Conscious Australian Shares ETF (VETH) |
Global X Bloomberg Commodity ETF (BCOM) |
3.8% |
23.44% |
13.39% |
22.36% |
15.51% |
5.49% |
Outperformance compared to inflation |
19.64% |
9.59% |
18.56% |
11.71% |
1.69% |
Around the world, we are seeing inflation remain stubbornly high. It's not great news for mortgage holders, however even if you're not paying down a home loan, persistent inflation can eat away at your savings and wealth-building capacity.
Very few Australians have enjoyed a salary increase equal to the 3.8% that is required to stay in line with cost-of-living increases. This is why investing in assets that outpace the rate of inflation remains one of the best ways for Australians to stay ahead.
Growth assets such as shares do come with additional risks. So please, always consider your investment timeframe and personal tolerance for risk before deciding where to invest.
That said, a diversified basket of ETFs is a hassle-free way to grow your wealth and outpace inflation. The more you diversify, and the longer you remain invested, the better your chances of beating inflation, building wealth through compounding returns, and riding out market volatility.