How Inflation Impacts your daily meals at the Koptiam
One of the biggest financial concerns expressed by most Singaporeans is the rising cost of living, or inflation. For instance, a report from an investment firm1 Wealth Insights 2022, 45% of those polled said inflation is their top finance-related worry for the year ahead. Furthermore, the fear of rising costs is particularly prevalent for those in the “sandwich’’ generation, meaning those caught in the middle – with living parents and children.
Using an inflation calculator and assuming an annual inflation rate of 3%, a sum of S$50,000 will only be able to buy S$27,683 worth of today’s goods and services in 20 years’ time.
Of course, inflation can fluctuate from year to year – currently, core inflation, which excludes private transport costs and accommodation is hovering around 4.8% but this is expected to moderate going forward, though no one knows for sure when this will occur.
What exactly is inflation and why is it important?
Inflation is an increase in the overall level of prices in the economy. For instance, 20 years ago, S$10 could have bought you around 3-4 plates of chicken rice but today, that same amount of money will probably buy you only two plates.
In other words, inflation has a big impact on how we get and use our money because we need to think about how its value will change over time. All the money that we save will be eroded over time by the effects of inflation. This therefore creates greater urgency to ensure that our savings and investing returns are sufficient to beat inflation or else we may end up with insufficient money in retirement.
Of course, not all prices rise over time. Increased competition in certain segments like TVs, laptops and mobile phones has driven prices down over the years.
However, if core inflation, which measures the prices of essentials is rising, then this should be of concern to all of us.
What causes inflation?
There are generally two types – cost-push and demand-pull.
Cost-push inflation occurs when the cost of producing goods increases, such as now when oil, natural gas and food prices have risen sharply because of the ongoing Russia-Ukraine conflict. In addition, the war has aggravated supply chain problems caused by the Covid-19 pandemic. Existing restrictions imposed on Russia and the potential for further restrictions continue to impact fuel costs, contributing to the wider supply chain crisis.
Singapore is particularly vulnerable to this type of inflation because of its open economy and reliance on importing food, oil, and other essentials from external sources.
Demand-pull inflation occurs when demand for goods and services exceeds supply, or as some economists say, “too much money is chasing too few goods’’.
A good example is during Chinese New Year, when prices of certain popular food items such as abalone and certain meats are higher than usual because a lot of people wish to buy them.
Central bank action
Most modern central banks target the rate of inflation in a country as their primary metric for monetary policy. If prices rise faster than their target, central banks tighten monetary policy by increasing interest rates in a bid to reduce the amount of money in circulation.
This is what is happening worldwide now, starting with the US. However, note that such moves tend to be more effective for demand-pull inflation and less so for cost-push.
Note:
1 Endowus
Credit Counselling Singapore
Published 14 October 2022.