Education, Retirement, Insights | 03 March 2021
If it feels like your dollar doesn’t go quite as far as it used to, you aren’t imagining it. The reason is inflation, which describes the gradual rise in prices and slow decline in purchasing power of your dollars over time.
The impact of inflation may seem small in the short term, but over the course of years and decades, inflation can drastically erode the purchasing power of your savings. Here’s how to understand inflation, and steps you can take to protect the value of your money.
Inflation means you have to pay more for the same goods and services. But if your income doesn’t keep pace with inflation, your buying power declines. Over time, inflation increases your cost of living if the inflation rate is high enough, it hurts the economy.
Key Takeaways
- As the economy picks up, so will inflation
- Inflation raises prices, lowering your purchasing power
- It also lowers the values of pensions, savings, and Treasury notes
In 2020, Singapore’s MAS Core Inflation Rate declined 0.2%. This actually means that Singapore experienced deflation in 2020 – where prices declined on average rather than increased.
In comparison, the 2019 MAS Core Inflation Measure came in at 1.0%. The deflation rate may also be a function of the challenging economy Singapore endured on the back of the COVID-19 pandemic.
Just because a deflation was reported does not mean that prices of everything declined. In reality, this just meant that prices declined on an aggregate basis, but there could have been categories of expenses that didn’t decline or even increased in price.
In the first half of 2021, Singapore’s core inflation positive for third consecutive month in April. And we can see that headline inflation is currently running at 5% in the US, and 2% in the eurozone. And it won’t stop here. In fact, the entire range of possible inflation drivers is currently at work, including higher commodity prices, supply chain disruptions, production bottlenecks, post-lockdown reopening price mark-ups and in the eurozone.
Does the world need to fear inflation again? The global supply of money has been rising at a rapid clip, with broader measure increasing by more than 20% last year in the U.S. alone. With an economic recovery and boom likely to follow the distribution of vaccines, many people are worried that all this cash will lead to higher prices.
The main reasons of inflation returning in the next two to three years could be:
First, the current aggressive global monetary and fiscal easing is unprecedented and is likely to create inflationary pressures sooner rather than later. Money printing by central banks is sky-rocketing, leading to a record surge in money supply globally.
Second, the supply shocks from the US-China trade war last year have now been exacerbated by Covid-19 lockdowns – meaning less globalization or even deglobalization – which is likely to be inflationary.
Lastly, after a protracted bear market in commodities, and a collapse in oil prices, significant supply destruction is underway. Any signs of normalization in demand would increase commodity prices from their current historically depressed levels.
Retirement plans at risk
Nonetheless, for retirees, there are substantial risks to rising prices. Under Standard Plan and Basic Plan of CPF LIFE, retirees often live on a fixed budget, having to absorb those higher costs can hit them harder.
Further, they’re not only paying for escalating food costs, housing and cars but also hefty medical expenses, particularly amid Covid-19.
To maintain your purchasing power, determine the right assets for your risk tolerance, considering your income, expenses and time horizon become inevitably important in today society.
If inflation is above what you’re earning from your saving, that part of your portfolio loses buying power. But there are other investments that make up for it.
For example, consider a mix of equities, commodities, bonds to offer some security.
This is exactly why you need a pretty healthy allocation because it protects your purchasing power in times of inflation.