We’ve all heard about inflation in Singapore being on the rise. But what does it actually mean, and how will it affect you, your savings, and your standard of living?
Very simply, inflation is the process in which the purchasing power of a given currency declines. This means that your dollar buys you less stuff than before. Inflation is most commonly tracked in percentage terms by comparing the increase in average prices of a given basket of goods and services over a period of time.
This process of inflation can be seen either from the perspective of the value of currency falling or the price of goods and services rising. Hyperinflation is widely-regarded as a dangerous scenario when inflation hits 50% or more per month.
Since change in prices of goods across the economy is not uniform, an aggregate basket of goods is often used to track and measure general inflation.
In Singapore, this basket is known as the Consumer Price Index (CPI), which comprises a weighted average of consumption goods and services from categories like Housing & Utilities, Food, Transport, Health Care, Education, Communication, Clothing & Footwear, and Recreation & Culture.
Alongside the CPI, also known as CPI-All Items, there are complementary CPI series derived from excluding certain items. Some examples of this are the CPI-Less Imputed Rentals on Owner-Occupied Accommodation and the MAS Core Inflation, which excludes Accommodation and Private Transport.
Based on the latest figures released by the government on 23 March 2022, Singapore’s CPI-All Items inflation rose to 4.3% year-on-year in February, up from 4.0% in January.
For 2022 as a whole, the government expects the CPI-All Items inflation rate to fall within the 2.5% to 3.5% range.
While this might seem modest, we should understand that inflation is also subject to the effects of compounding. Over time, if left alone, inflation has the real potential to erode the value of our savings – and with it, our financial security and retirement plans.
Economists have long studied the causes of inflation, and have broadly identified various phenomena that contribute to inflation. However, the root cause can all be traced to the increase in money supply outpacing the amount of goods and services in circulation in the economy.
We can see that a combination of factors have led to the inflationary pressures we face today – the war in Ukraine, supply chain difficulties around the world, and quantitative easing fiscal policy by the United States Federal Reserve over the past few years.
Regardless of the causes, the end result of inflation is the same. You can buy less goods and services today than you could yesterday, and your cost of living keeps going up.
In the financial markets, inflation has an adverse impact on assets that are denominated in currency, such as bonds and money market funds. On a personal level, if you do owe money – say from a motor loan or mortgage – inflation can be seen as net positive for you, since you’re paying back money that has been devalued.
Inflation also benefits those who own assets such as properties, commodities and equities, since the value of their assets increase and they get to set prices. The effort to avoid the erosion of monetary savings might lead to more money pouring into these assets, driving up their value even further.
For those of you working to make ends meet, high inflation increases the cost of living, since any increase in salaries takes time to catch up – if at all. On a macro scale, this might put a damper on discretionary spending and lead to an overall slowdown in economic growth.
As you can see, inflation has its winners and losers. It is with a deeper understanding of what it is, and how it impacts you, that you can make better financial decisions to safeguard and continue to grow your wealth.
Inflation over time is a given. What differs is the pace of inflation. Given that, it is prudent for anyone making plans for their money to include measures to mitigate the negative effects of inflation.
For instance, we can invest in assets that traditionally outpace the rate of inflation over time. These include stocks, mutual funds, exchange-traded funds, gold, and more recently – cryptocurrencies. #notfinancialadvice
While capable of producing eye-watering returns over the long-term (think decades), the stock or cryptocurrency markets can be volatile in the near-term (one to five-years) and investors who are just seeking to hedge against inflation might want to take on that additional volatility.
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