Inflation to beat

Press, 19 August 1982, Page 24

Inflation to beat

Many, people who back horses must know that eventually the Government finishes up with most of the gains. I suppose each one believes that he or she will be luckier than most and strike it rich one day. However, it is a demonstrable fact that most people only acquire wealth by hard work coupled with good sense. Investing in shares is one of the few activities that allow you to pretend to have a flutter with the satisfaction of applying skill to make a profit, depending on how you want to treat it. Also, it gives you a chance to beat inflation. Inflation is the fall in the value of money because of rising prices. We shall not inquire here how it comes about — the phenomenon is nonetheless real and too familiar. Part of the problem is that inflation tends to become cumulative, as higher prices mean higher costs, and higher costs lead to higher prices. The output of many firms is the input of others, so that higher prices become higher costs, and because of the general buoyancy of incomes and demand the higher costs are more likely to be paid for by final buyers rather than out of profits. An additional accelerating effect on inflation is provided by people’s expectations, which tends to add to demand and reduce savings, and leads to prices being costed on expected replacement costs and wage demands based on the expected cost of living increases. Even modest inflation tends to become

more and more rapid, and unless drastic,; measures are taken, may become uncon-j trollable. Not the least consideration in the current): wage-price freeze is the damper it. may puton expectations, although of itself this would not be enough. The current inflation will not be easily checked. One way of beating inflation is by increasing the earnings on investments at a faster rate than the rate of inflation. ‘

In the period 1945 to 1970 the rate of inflation in New Zealand was about 4 per cent a year. This was higher than most developed countries but lower than Australia.

During the period share prices roughly quadrupled, as measured by the index, i which is an averaging market indicator. Some shares outperformed the index, and.: these were not even hard to find: the point, is that with ordinary common sense most*) investors in shares did very well. <s■ In the last decade share prices roughly . doubled, but the consumer price index rose\' about threefold. The various oil shocks were too much to cope with, giving rise to strong . inflation throughout the world. High interest rates and a depressed economy made it difficult for companies to earn the kind of profits of the previous-/* decades. •<

However, once inflation is brought under control arid the economy picks up again, the share market is well placed to resume the strong trend of the past, and will no doubt once again keep ahead of a modest level of inflation. ■ ■