Hey Guys,

You will have to forgive me for this article; I wrote this on holidays in Australia so my research of figures will be based on Australian figures. The great thing is that you can easily transpose the figure from dollars to pounds without too many problems. The principles hold true in Australia and the UK and in most if not all economies.

Inflation is simply the general rise in prices over time.

• A litre of milk that cost 15 cents in 1955 now costs around $1.


• A loaf of bread costing 11 cents in 1955 now costs $1.25.


• Average weekly earning have risen from $31 in 1954 to $580 in 1991.

If prices continued to rise at the same rate over the next 35 years as they have done over the last 35 years the litre of milk will cost $5.77, the loaf of bread $14.20 and the average weekly wage will be $10,271.60.

We will all be millionaires, but will we be better off? Maybe not!

Now why is it important to understand inflation in terms of your portfolio?

Well firstly inflation will provide you a sure fire way to refinance your property at regular intervals allowing you to take large amounts of capital regardless of other issues such as supply & demand or market cycles.

Secondly, inflation will increase the value of the rent you receive over time meaning that the value of the cashflow from your property is maintained. This is great news once you retire and are relying on the cashflow from your property portfolio.

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Think about a £100,000 house today. If the government instructs the Bank of England (often called the BoE) to target an inflation rate on 2% - 3% per year and the BoE achieves it on a long term basis that means that our house is worth £102k in the second year, £105k in the third, £107k in fourth, 109,113,115,117,120, and £122k in the tenth year.

Now that means we have made £22k over 10 years. But have we really?

In fact we have actually not made any money because over the 10 years the amount that say £100 of goods did buy 10 years ago will now only buy you the same£100 of goods. It’s just it will cost you £122 now. So investing based only on inflation isn’t a good idea.
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Now most people cannot (or at least choose not too) accept property prices go up over time. For some reason they choose to think that because property has consistently risen over the past 100 years that for some reason it won’t continue. If you ask me that is just plain stupid thinking. So even though in our example the property only went up by £22,000 over 10 years this is just the inflation proportion of the increase so if the property doubles in 10 years from £100,000 to £200,000 then the actual real profit will only be £200,000 less £122,000 or £78,000. This is due to the effect of inflation on your property.

Still not a bad profit though.

Live with passion,

Brett Wood