What is inflation? | Investing Nugget

Demystifying some commonly used investing terms to help you build your knowledge and get comfortable with the basics! 💰 📚 💪

We’ve all heard about how inflation has made our money “smaller” faster than it did in our parents’ time. What exactly is the meaning of inflation? Is there more to rising prices? Let’s look at why and how it happens, and what you can do about it!

What is inflation?

Inflation is a decrease in the purchasing power of a currency; the decrease in your money’s ability to buy goods and services. 

For example, you can buy fewer items at the grocery store with $10 in 2022 as compared to 2002, or even as recent as 2021.

Picture this. You’ve been eyeing a beautiful pair of $200 shoes for a year now and have finally saved up enough to buy it. At the shop counter, you’re unpleasantly surprised to find out that the price has hiked up to $220! But because you’ve brought exactly $200 to the shop, you’re short of $20 and would have to make another trip down the next day. 

At the moment, you’re unable to buy that pair of shoes because the value of your $200 has dropped – it can no longer be exchanged for that pair of shoes. In other words, your purchasing power as a consumer has been reduced.

That’s inflation in a nutshell. It refers to how a currency’s purchasing power has been reduced, having the effect of goods and services becoming more expensive. The amount of money that was once able to be exchanged for a particular amount of goods or services is no longer enough.

What causes inflation?

There are a few key reasons. Inflation may happen when there’s a rise in production costs, which can be traced to the rising cost of raw materials or workers’ wages.

On the other hand, inflation may be due to a surge in demand for certain products and services.

As the demand for a particular product or service rises, there is less to go around. When fewer items are available, consumers may not mind paying more just to secure the item. This shortage could happen when the global supply chain is disrupted, for instance, during a pandemic or a war.

Companies may be opportunistic too – taking the chance to raise prices simply because their customers are willing to fork out more.

Finally, central banks such as the Monetary Authority of Singapore (MAS) can help regulate inflation since they can directly or indirectly control short-term interest rates.

However, when these banks keep interest rates low to stimulate the economy, as they did in response to the Covid-19 pandemic, they may add fuel to the existing inflationary pressures.

How does keeping interest rates low help the economy? 

A low-interest rate will typically encourage people to spend money (yes, shopping can stimulate the economy) or even to take out a loan, given the cheap interest, to buy the goods they could not afford to pay in cash. 

Conversely, a higher interest rate will encourage people to be thriftier and save their money (less stimulation to the economy).

How does inflation affect me and why should I care?

For one, you may start to see sneaky changes in price tags (and not for the better!). 

The core inflation rate was reported to be at 2.2% (year-on-year) in February 2022.

What is core inflation rate?

The core inflation rate tracks the changes in the price of a basket of goods and services commonly purchased by Singaporean households (excludes housing and cars).

This means that you may expect to see a similar or possibly even higher hike in prices of consumer goods and services- clothing, gadgets, hobby equipment, and even necessities such as food and electricity.

Inflation’s effect may be more obvious over a longer period of time, for example, when you have a saving goal that spans a number of years. This is because as you are working hard towards the target amount, inflation is constantly weakening your dollar with each passing year. 

The result? You may have reached the target sum in the end, but that amount of money no longer has the same purchasing power it once had.

The not-so-good news – the bank isn’t your best ally

Here’s the thing – the bank can’t always protect your purchasing power from shrinking. 

Despite the Deposit Insurance Scheme protecting your bank deposits for up to $75,000, the modest interest rates of saving accounts and even fixed deposits reap only minimal returns. The speed at which the bank grows your money is currently significantly slower than the speed at which inflation weakens your dollar and your purchasing power.

Imagine this. You have $1000 in a savings account that gives you a 1% interest p.a. A year later, the bank would have earned you $10, and you’d have a total of $1010 in your account. However, with Singapore’s current core inflation rate at 2.2%, you would need $1022 to enjoy the same purchasing power you had 1 year ago.

As a rule of thumb, if your savings don’t keep up with the rate of inflation, the purchasing power of your savings will be weakened.

Nominal returns v.s real returns. Is there a difference?

Now, imagine a scenario where your investment gives you a 1% return.

While it may seem that you are growing your money, that 1% isn’t the real returns you’re getting. It’s the nominal returns. Nominal returns refer to the raw earnings you get from your investments, without taking inflation into account. 

Real return = nominal return – inflation

In the case where your nominal return is 1%, your real return would be 1% – 2.2% = -1.2%.

That means that despite investing, your purchasing power is still being reduced by inflation.

Is there a way to beat inflation?

But it’s not all gloom and doom, you can do something about it! 

Savvy cash management tools such as Earn+ give you a good chance at protecting your money and purchasing power from inflation. 

The projected yield of Earn+ is estimated to be 2 to 2.5% interest p.a*. With such potential returns, Earn+ aims to grow your savings at a speed that keeps up with that of current inflation, so that you’re in a better position to preserve your purchasing power. This is because even as things become more expensive, the expected returns you earn with Earn+ help to make up for the increase in prices, cushioning the impact of inflation. 

You could also beat inflation with equities and other riskier investments, possibly at a quicker rate. However, you would be bearing the risk of potentially making losses in the short term, and might need to set the sum aside for years before seeing significant gains. 

On the other hand, instead of locking in your money, Earn+ gives you the flexibility of accessing and withdrawing anytime.

Plus, your investment is being looked after by our carefully selected asset management partners, Fullerton Fund Management and UOB Asset Management Ltd, leaders in the industry with proven track records. 

This makes Earn+ suitable for supercharging your money for short-to-medium term timelines, such as 12-18 months, when you’re saving for say, a year-end trip or minor home improvement works.

Get started with Earn+ now to boost your dollar! 

*Projected yield and returns are not guaranteed or protected. Please refer to the latest projected yield and returns.

Find out more about how Earn+ supercharges your idle cash, or get started on the app.

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Komsan Chiyadis

GrabFood delivery-partner, Thailand

Komsan Chiyadis

GrabFood delivery-partner, Thailand

COVID-19 has dealt an unprecedented blow to the tourism industry, affecting the livelihoods of millions of workers. One of them was Komsan, an assistant chef in a luxury hotel based in the Srinakarin area.

As the number of tourists at the hotel plunged, he decided to sign up as a GrabFood delivery-partner to earn an alternative income. Soon after, the hotel ceased operations.

Komsan has viewed this change through an optimistic lens, calling it the perfect opportunity for him to embark on a fresh journey after his previous job. Aside from GrabFood deliveries, he now also picks up GrabExpress jobs. It can get tiring, having to shuttle between different locations, but Komsan finds it exciting. And mostly, he’s glad to get his income back on track.