Inflation and interest rates are buzzwords peppering headlines, and some commentators are painting a grim picture. So what’s inflation, can interest rate hikes cool the inflation jets, and how can we be mindful with money? 

Strange economic forces have been at play since the global financial crisis, which exposed banking issues. Since then, we’ve benefited from cheap energy, cheap goods from China, including our lockdown stretchy pants, and all the components that grow business profits. While Aotearoa side-stepped the worst GFC ripples, we weren’t immune to a global pandemic. Covid triggered a domino of problems. 

It slowed once-flowing supply chains, created shipping bottlenecks (not even humble tinned tomatoes are reaching the edge of the world), caused immigration-related labour shortages fueling wage hikes, and saw central banks like the US literally print money, and the NZ dollar’s been on a rollercoaster, seeing costs passed onto us, the consumer.

Our Reserve Bank is likely to increase the official cash rate (OCR) in a bid to slow inflation. The OCR triggers interest rates rises and falls, like for mortgages. Currently, it’s at 1%, but some Kiwi banks reckon it could rise to around 3% over the next year, and they’ve hiked up mortgage rates in anticipation. 

Why raise the OCR? Because it slows inflation. Inflation’s the cost of living - goods, like food and petrol, and services, like haircuts and taxis. It’s measured by the consumer price index (CPI), which tracks a “basket” of items used by the average Kiwi - like today’s cost of milk, sourdough, petrol and hair cuts compared to one, five or ten years ago. And right now, inflation’s sweltering at 5.9%. 

High inflation hurts vulnerable, lower wage and elderly people, destroys savings, increases borrowing costs, forces higher wages and increased welfare payments to keep up with the cost of living, makes exports less competitive and creates business and social anxiety. 

But as with many things in life, you hold the power and here are three ways to take charge of your money in 2022.

1. Adapt to mortgage increases

Higher interest rates mean you typically can borrow less money for a first home or renos and could expect higher repayments for the same money as last year. If you have a mortgage, you’ll likely see a spike in your repayments. Good news is, because banks have done their homework on borrowers, Kiwis are almost all likely to adapt by tightening belts and shopping around for better interest rates and terms.

2. Cool household spending

While things are more expensive, you may re-prioritise how you spend your money. Because your grocery shop and the car ride there costs more, you might skip takeaway coffees, and halt big purchases, like a new car. You may also choose to slim down to one - or no - streaming services, listen to Spotify with ads, and renew your library card as we weather the storm.

3. Start hatching tomorrow’s long term wealth today

While keeping your rainy day pot full is important, to grow long term wealth, investing can supercharge your money over the long term. US Share market growth since 1926 has averaged around 10% each year, and while it’s no guarantee of the future it’s a benchmark. By investing 10 years or longer, you could reap the benefits of compounding growth, which is interest on top of interest that grows exponentially. Consider investing in a fund that spreads your money across hundreds or thousands of companies in one go. You could try techniques like auto-investing a set sum every pay day, or something known as dollar-cost averaging, where you choose your top investments and spend at a fixed dollar value each time on those shares.

Be confident that however the economy moves, you’re in charge!