Inflation in America has hit a 40 year high of 6.2%, and in the UK it has hit a 10 year high of 5.1%. While inflation remains relatively under control in Australia at 2.1% there is a big concern that once we all start moving around and spending again, inflation could get out of control here as well. So, what does that mean if you have a lot of debt?
Inflation, in summary, is when the price of everything increases. If inflation is 6.2% for 3 years everything is 19% more expensive, or your wage would only be 82.5% of what you earned 3 years before.
Traditionally the view has been that inflation hurts savers and helps borrowers; that's because you get to repayment debt with "inflated money". However, that only works if your wage goes up and the interest rate is fixed.
If inflation goes up, the RBA (Reserve Bank) will try to fix it by putting interest rates up. Most debt in Australia is variable, meaning that if the RBA puts interest rates up, the rate on the debt goes up. If you've got a credit card or a personal loan and the RBA puts rates up, your repayments are going up!
So, inflation will mean a future where everything (petrol, groceries, entertainment, rent etc.) is more expensive. You earn, in relative terms, less than you do now and the repayments on your debt are higher.
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