Introduction
Inflation is the general increase in prices of household goods such as food, clothing, transportation, etc. This leads to a decrease in purchasing power and hence, the same dollar you have can be used to buy fewer items as before.
Inflation is measured by the percentage increase of our consumer price index (CPI) on an annual basis. CPI is a basket of household goods and they have a weightage in it usually presented in a pie chart. In Singapore, CPI is compiled by the Department of Statistics on a monthly basis.
Who does inflation affects?
Inflation affects everyone. Inflation is resulted from 2 possible scenarios: the economy is booming or the economy is struggling. In the event where the inflation is the outcome of a thriving economy due to increase in national output, the increase in income may increase at a higher rate than prices.
However, if inflation is brought about by other factors such as increased cost of production. For instance, companies are racing to produce output and bidding up prices for raw materials.
In a report by CNBC, it states that "lumber prices alone have risen 124% Copper, often seen as a proxy for economic activity, has jumped nearly 36%." When key commodities prices increase, it has a ripple effect on the economy and consumers will feel the pinch.
Why we may be more affected than the rich
To an ultra wealthy, food and other necessities are NOT a significant component of their income and wealth. But to us most, it is.
On the other hand for the poor, an increase in prices of necessities may result in financial hardships when income is used to fulfil monthly expenses.
In addition, people with high income are generally highly skilled and a valuable asset to companies. Their income may not be affected or even experience a pay raise. If we are not as skilled, we are at risk of being replaceable and may face retrenchment in a bad economy.
The rich also hold assets such as real estate and gold which may rise in prices and hence further increasing their net wealth. They may also own business such as coffeeshops and can sell coffee at a higher price.
Lastly, the rich having more assets are deemed more credible to take up loans to tide through tough times as compared to most of us.
Singapore inflation, is it only 2%?
According to a CNA report, Singapore's overall inflation rose to 2.1% in April from 1.3% in march, driven by higher private transport and accommodation costs as well as an increase in core inflation.
The drastic increase in both core and headline is due to low base prices in 2020 when the pandemic hit.
MAS has commented that external inflation has risen amid recover in global price, as well as turnaround in producer price inflation in major economies.
Singapore is inflation rate is largely affected by other countries. As an open economy and heavily dependent on imports, an increase prices of imports will cause prices of goods in Singapore to increase.
For instance, The Stats Times reported fresh chicken prices in Singapore are expected to rise as suppliers deal with rising cost of procuring from poultry farms in Malaysia. This was due to COVID disrupting supply chains causing a price increase of 10% to 15%
What are some ways to tackle inflation!
While low and stable inflation rate is good for the economy, high and unprecedented rate is extremely damaging.
Hence, it is the government's aim to keep inflation in check by coming up with policies to tackle inflation. Some policies include monetary policies, controlling money supply and fiscal policies. I will not explain the details as they are macro-economic policies which we have no control over.
I will instead share some methods you can take to tackle this insidious tax that erodes the value of cash.
Firstly, you can invest in real estate. You can either purchase properties or invest into publicly traded REITS. This is because real estate tends to maintain or rise in an inflationary environment due to higher rental incomes. In addition, if you are looking to purchase a home, you should do so as land prices tend to appreciate over time.
Take for example, in the 1990s Orchard land price used to cost $800 psf. Today, it costs over $3000 psf.
Secondly, Gold is a popular hedge against inflation as gold does not lose its value and its demand may rise when more people want to hedge against decreasing value of cash.
Lastly, investing in stocks is a good way to tackle inflation over long periods of time. With proper research and purchasing stocks at good valuations, it is most certain that your returns will be larger than rate of inflation, in the long run.
Closing thoughts
Inflation is an inevitable phenomenon due to a myriad of macro-economic factors. It is important to have a diversified portfolio to tackle inflations.
If you are in the lower-middle income range you will realise how detrimental inflation can be. You should constantly seek to increase your skills so as to stay relevant to market needs.
A wise man once said companies are always looking to increase profits by reducing costs. You as an employee is a cost to the company. If you do not prove your worth, you are easily replaceable.
Thus, one should always work, think and invest like the rich. There is a plethora of sources for you to learn from and check our YouTube channel!