What rising inflation means for investors
What’s happening
The average cost of a loaf of bread in America was 9 cents in 1930.
In 2021, it became $2.12.
Rising inflation has been taking over search trends in the investment world. Singapore’s core inflation rose to its highest in 15 years and the US inflation gauge reached 6.8%.
Let us explore the possible reasons behind this.
Why a bit of inflation is good
First and foremost, inflation is defined as a decrease in the purchasing power of money. This can be seen from a general increase in the prices of goods and services in the economy.
As counter-intuitive as it sounds, some inflation is generally healthy for an economy.
As an economy grows, its demand for goods and services increases along, which in turn pushes prices higher.
However, too much inflation is detrimental to the economy and society as consumers’ purchasing power becomes diluted and corporate margins get eroded. This often causes widespread instability.
What causes high inflation
To understand the drivers of inflation in today’s environment, we can take a look at Singapore’s economy.
The young nation’s economy is small and open, relying heavily on imports. This makes its prices susceptible to global events.
As Covid becomes the new normal, the world is experiencing a strong recovery in global growth and demand. Compounded by the supply shocks and geopolitical tensions from the Russia-Ukraine conflict, as well as pandemic-related disruptions to global supply chains that we have yet to recover from, oil and gas prices have surged.
Ban of chicken exports to Singapore by Malaysia.
One way the chain effects of a disruption to supply can be seen from the recent ban of chicken exports to Singapore by Malaysia.
The ban triggered a supply shock, resulting in buyers needing to turn to other countries or seeking frozen chicken as an alternative. The former was more expensive, and the latter was perceived to be of lower quality.
Add in the rising cost of natural gas used in cooking and you can understand why some hawkers have no choice but to increase food prices.
Chicken rice hawkers had to up food prices.
What investors should note
We all know that inflation will eat away the value of money over time. However, how much is your money being eroded away?
The current inflation rate in Singapore is at 2%.
If you leave your money uninvested, you will lose about a quarter of your value in 20 years – from S$100,000 to S$74,008.
Does seeing the lump sum of accumulated ‘loss’ put things into perspective?
What could you have spent the ‘lost’ money on?
A good way to hedge against inflation is to build a stable investment portfolio that optimises returns while staying within your risk appetite. Investing does bring with it an element of risk, but the rewards can well be worth the trade-off.
It is important to diversify globally and across investment tools, so you reduce the extent of volatility of your portfolio..
Investing becomes more paramount in ensuring that your money grows in pace, or faster, so that you can have something to rely on next time.
Ensure that your money grows in pace, or faster.
You can also consider investing in yourself. Spend some time to equip yourself with better qualifications, or reskill to future proof your career.
This can increase your future earning power, generate new income streams, and keep your salary inflation-proof.
Investing is a good way to beat or hedge against inflation.
The truth is that inflation is here to stay.
Budding investors need to understand and accept that inflation will not disappear. It is necessary in small amounts to provide economic growth.
As such, it is prudent for investors to find means of hedging your money against inflation. Apart from finding traditional investment vehicles to grow your money, you can also invest in yourself to grow your monthly paycheck.
Not sure what to invest in?
When in doubt about what you should invest in to be aligned with your life goals, reach out to us.
Here at Life First Advisory (LFA), your personal life milestones matter to us.
Speak to us to find out more about how we can help you achieve your goals.