Inflation

Inflation causes money to lose value, because it will not buy the same amount in the future as it does now, or did in the past. For example, if there was a 4% inflation rate for the next 20 years, a $1 purchase today would cost $2.14 in 20 years.

The following graph demonstrates the effect of inflation over time.

This is why it is important to consider inflation as a factor in any long-term investment strategy, in particular your superannuation investment. Remember to look at an investment's real rate of return, which is the return after inflation.

Today's dollars vs future dollars

Where figures are expressed in today's dollars it means the amount is discounted to take out the effect of inflation. In other words, the amount reflects the current buying power of your final superannuation account balance. For example, $100 in 20 years' time may be worth only $60 today.

Where figures are expressed in future dollars, it means the amount includes the effect of inflation; that is, what the amount is expected to be in the future. Using the same example, the future value of $60 in 20 years’ time may be around $100.

Beating inflation

An aim of most investments is to provide a return above the inflation rate. This ensures the investment does not decrease in value.

For example, if the inflation rate is 4% and investment fees and charges are 2%, then the investment will need to earn at least 6% to increase in value.

If the after-tax return on your investment is less than the inflation rate, your assets have decreased in value. In other words, they won't buy as much today as they did last year.

There is always a risk that your investments will not keep pace with inflation.