1. Why is the cost of living rising? 

The short answer is inflation. In simple terms inflation is a general rise in the price of goods and services, meaning you pay for more for every purchase you make. But there are a few specific forces that are combining to drive the cost of living up. 

• About a third of the world’s manufacturing capacity is based in China and continued lockdowns in some of their biggest cities has created lower production and a delay in the supply chain. With the rest of the world making its way out of the pandemic the demand for goods has increased and now global supply chains can’t keep up, so prices have risen.
• The price of fuel has risen in part due to the increased demand for goods post lockdowns and the Ukraine-Russia war. The West introduced sanctions on Russia, who account for about 10% of the global oil supply, and so there is a gap in supply which has pushed up prices at the bowser.
• And locally, the increased cost of transportation and the rain and floods this year has heavily affected some farmers which has added to already high prices, especially for fruit and vegetables.

2. Why are interest rates rising?

High interest rates and high inflation work hand in hand. Higher interest rates aim to slow consumer spending and borrowing, which in turn, should reduce demand which combats the increase in inflation. 

So, in other words, the average Australian with a home loan will be paying more of their salary to the bank in interest which leaves less disposable income to spend or invest. This reduction in disposable income means reduced demand for goods and services which eases the pressure on supply (which is causing the current high prices) and the economy should become more balanced.

3. Why is fixed interest falling?

Fixed interest investments, or bonds and debentures, are currently underperforming because interest rates are rising. It sounds counter-intuitive, but for fixed interest investments, when interest rates rise their market value goes down.

Think of it this way: Let’s assume that interest rates are 2% and you invest $100 in a loan that will pay you $2 every year for the next 5 years.  

If interest rates drop to 1%, the loan will still pay $2 a year which makes it more valuable because investors now need to invest more than $100 to generate $2 worth of yearly income.  

On the other hand, if interest rates increase to 3% your loan will be worth less. No investor would be prepared to pay $100 for an investment that only generates $2 of income every year when they could be getting $3 of income for a $100 investment elsewhere in the market. 

Need a more detailed explanation? This article may provide more clarity.

4. Why are super balances fluctuating? 

Super balances are changing day to day for many investors because local and global investment markets are experiencing volatility caused by the above factors - interest rate hikes, rising inflation and geo-political tensions. These at times have caused the markets to fall. 

This means that investment returns at the end of this financial year will be lower than last year and are likely to be negative for most diversified investment options.  

5. What should I do now?  

Firstly, don’t panic. Investments like superannuation are for the long-term and you should expect some volatility along the way. History has generally shown that when markets take a big hit, they also tend to recover. If you are thinking of switching investment options make sure to read Should I Switch Investment Options. 

Secondly, evaluate your own unique set of circumstances and decide if you need tailored advice. If you are close to retirement, or you are unsure of your risk tolerance, getting personalised advice could provide some peace of mind. To book an appointment with a TelstraSuper Financial Planning Adviser call 1300 033 166 or fill in the online form and an Adviser will call you back. 

And finally, a volatile market can be very worrying so our Chief Investment Officer, Graeme Miller, will be hosting a couple of live webinars in July called 'Your volatility questions answered', to provide a brief market update and answer any questions you may have. Register now to ensure yourself a spot.