How Does Inflation Impact Our Life?

Dear Reader

A report just released on 5th Dec 2007 by DBS Group Research shows that price pressure is rising rapidly along side strong economic growth. CPI inflation in Oct07 shocked the market with a 3.6% YoY jump and the outlook is set to worsen in the months ahead. Annual average inflation will rise to 4.0% in 2008 from 2.0% in 2007. Despite higher inflation, the central bank will be apprehensive towards further tightening due to growth concerns.

Inflationary pressure has built up substantially amidst strong economic growth and is now beginning to show up in the headline inflation number in a big way. Risks of further acceleration in the price level are mounting and the inflationary outlook is set to worsen in the quarters ahead.

The current high inflation faced by the Singapore economy is the result of a confluence of factors. Externally, high food and crude oil prices are serious concerns while domestically, escalating wages and rentals are making things a lot trickier for policymakers.

Food, which forms the largest share of the CPI basket (23.4%), went up by 4.3% YoY in Oct07. Recent releases of the Domestic Supply Price Index (DSPI) and the Import Price Index (IMPI) for food suggest that the worst for food inflation is not over (Chart 2). Food DSPI and IMPI, which represent the domestic prices of basic food ingredients rose by 10.3% and 10.9% respectively in October. That should translate to higher food inflation over the next 4-6 months. In fact, we expect food prices to rise by 5.3% in 2008.

Question: How Does Inflation Impact My Life?

Inflation hurts your standard of living because you have to pay more and more for the same goods and services. If your income doesn't increase at the same rate as inflation, you will find your standard of living declining even though you are making more. Also, inflation doesn't impact everything equally, so that some things (such as gas prices) can double while other things (your home) may lose value. For this reason, it makes financial planning more difficult. Inflation is really bad for your retirement planning because your target will have to keep getting higher and higher to pay for the same quality of life. In other words, your savings will buy less and less, so you will need to save more and more. However, everything you buy today costs more, so you have less left-over income available to save.

Inflation has another bad side effect....once people start to expect inflation, they will spend now rather than later, because things will only cost more later.

This consumer spending heats up the economy even more, leading to further inflation - this situation is known as spiraling inflation because it spirals out of control.

It is also important if you are holding bonds or Treasury notes. These fixed price assets only give a fixed return each year. As inflation spirals faster than the return on these assets, they become less valuable. As they become less valuable, people rush to sell them, further depreciating their value. As their value becomes lower, the government is forced to offer higher interest rates to sell them at all.

Learn how to build your wealth and manage your money. Equip yourself adequately with financial literacy. If it is not now, then when? Many people tend to wait for the right time to do something right. There is no such thing as the best / right time because time will never be right.