Unless you have been literally living under a rock, you’ll probably have some idea that inflation is rising in Singapore. But how much exactly is inflation costing you? And perhaps more importantly, how much in investment returns should you be aiming for to hedge against inflation?
We’ll get into all of that – and more – in this article. If you need a quick primer about what inflation is, we covered that in detail in this previous article.
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Based on a report jointly released by the Monetary Authority of Singapore and the Ministry of Trade and Industry, Singapore’s overall inflation rate in April 2022 was 5.4% on a year-on-year basis, flat from March, which was already at a 10-year high – as measured by the Consumer Price Index – All Items Inflation.
According to the report, inflation in areas like food, retail, as well as electricity and gas prices saw a steeper increase. These were attributed to the continued presence of inflationary pressures, such as increased commodity prices globally, as well as supply chain disruptions from the Russia-Ukraine war and COVID-19 flare-ups in China and regionally.
The government expects the eventual general inflation to fall between 4.5% to 5.5% for the entire year of 2022 as some of the external inflationary pressures recede, even though it does not rule out the risk of further shocks driving up inflation.
Looking ahead to 2023, many economists expect Singapore’s headline inflation to reduce to 3%, while the country’s GDP is projected to expand by a modest 3%.
Understanding the macro-economic inflation rate is well and good, but how does it translate into dollars and cents for us in daily life?
First, electricity and gas prices continued their steady climb in tandem with hikes in electricity and gas tariffs, which are reviewed quarterly. Electricity tariffs from April to June were set at 27.94 cents/kWh, before GST. This is more than 40% higher than what it was two years ago.
Aside from residential households being impacted, higher electricity prices led to eateries and restaurants operating for shorter hours to cut costs, or even needing to stop operations permanently.
Petrol and diesel prices have also increased significantly, no thanks to the ongoing Russian-Ukraine war. After steadily increasing by more than 10% in March, prices for premium 98-octane grade petrol breached $4 for the first time in June.
Sustained increases in fuel costs don’t just affect drivers, since these price hikes tend to trickle down to consumers from businesses that incur greater costs for transportation and logistics.
Even food isn’t spared by the onslaught of inflation, including meat (5.7%), vegetables (4.7%), cheese & eggs (6.7%), and hawker food in general (4.2%). Anecdotally, hawker centre vendors have been reported to have raised their prices by up to $1 for food and $0.20 for drinks.
For example, prices have increased on items like the ubiquitous economical rice, chicken rice ($3 to $3.50), soya bean milk ($0.70 to $0.80), and takeaway drinks ($1.20 to $1.40). In particular, the price of coffee is set to rise even further, due to lesser coffee bean yields from an unfavourable weather season.
Over time, persistently high inflation has the real potential to erode the value of our savings – and with it, our financial security and retirement adequacy.
Given the increased pace of inflation, it is prudent for anyone making plans for the year to take active steps to mitigate the value-eroding effects of inflation.
On the one hand, we can examine how we can reduce non-essential spending or reduce our expenditure without adversely affecting our quality of life. Of course, there are limits to how much we can save, which brings us to the subsequent points.
As a salaried employee, now is a great time than now to aim for an increment, bonus, more overtime pay, or a promotion. After all, if your salary didn’t increase at a rate that at least kept pace with inflation, in essence, you received a pay reduction. This is because your salary could now buy lesser goods and services compared to last year.
Another way to increase your earnings is to look at monetising your free time with a side hustle. Ad-hoc work, part-time gigs, or freelance projects are increasingly common among Singaporeans, though this might not be appropriate for everyone, whether because of conflicts with their employment terms or because they have other demands on their time.
Finally, we need to make our money work harder for us. Not optimising our savings would now have an even greater opportunity cost than ever, since the value of our hard-earned money is being eroded faster than ever.
The stock market bull run of the past few years has now given way to turmoil. The adage that you should only invest funds that you can afford to lock up for the long-term (think decades, not years) proves to be sound and obvious advice.
Having said that, we need to look even more seriously at how we can optimise our cash holdings.
All of us certainly use one or more savings accounts. However, if we were to park a large amount of cash in these savings accounts, we would be earning a measly 0.05% per annum, which is grossly inadequately to hedge against inflation. In fact, bank savings accounts would need to return 100 times more simply to match an inflation rate of 5%.
So-called high-interest savings accounts are better – but only barely so. Even after jumping through many hoops, you would typically be able to earn between 0.4% to 0.7% per annum, and only start seeing interest rates upwards of 1% if we have huge deposits.
Traditional fixed deposits have rates slightly north of 1% for maturity periods of between 1 year to 5 years. Funds in fixed deposits come with the downside of being locked up and thus highly illiquid.
Cash management accounts have grown in popularity in recent years, thanks to slightly higher yields. Here is an illustration from some providers in the market, based on their reported indicative returns. Do note that the risk profiles differ across products, so this by no means suggests one as superior over another.
For traditional financial instruments, non-guaranteed cash management products are as good as they come to park short-term funds. But if you want to chase higher returns that stand a chance to hedge against inflation, then you need to look elsewhere.
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