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Inflation is not going away.

Thursday, December 6, 2012

Between inflation and deflation, governments would rather have the former. However, if inflation remains elevated over a prolonged period, then, we will have problems aplenty.

I am not an economist and this is not going to be an economic essay. This blog post is inspired by a report by Bloomberg which says how elevated inflation in Singapore is persistent and unlikely to go away. The repercussions are real and grim.



As the negative effects of inflation would affect middle to lower income earners more than the rich, it is even more urgent that we do something to at least protect our wealth.

Sections from Bloomberg's report:

Singapore is grappling with the elevated inflation that comes with years of economic growth and population expansion on an island smaller than New York City, with rising demand fueling record property and car prices.

Singapore has the highest inflation rate among 27 economies with GDP of at least $100 billion and classified by the International Monetary Fund as advanced. The island’s inflation has exceeded 4% every month but one since November 2010, more than double the 1.9% average in the past two decades.

Singapore, which uses the exchange rate to manage inflation, unexpectedly refrained from slowing the pace of its currency’s appreciation in its October policy review even after the economy contracted last quarter. The Singapore dollar’s 6.4% gain this year has done little to damp inflation stemming from domestic price pressures.
Higher car and property prices and the measures to tighten rules on hiring overseas workers are driving up the “overall cost structure” of the economy, spurring inflationary pressures that are a result of “self-imposed” policies, according to DBS Group Holdings.

I have shared my thoughts on wealth creation here on a regular basis. We want to grow our wealth but for many, taking the step to at least protect their wealth from being eroded by inflation would be significant and, in certain cases, it would be quite an achievement. All of us have different circumstances, after all.

It is more important now than ever before that we make sacrifices and put in place plans to secure our financial future in a world that is increasingly uncertain. People who still think Singapore will continue to do well simply because we are in Asia, the future global growth engine, should hedge their positions. Things could get worse.

Read Bloomberg's report: here.

Related posts:
Go to the right side bar and look for the box with the label "Wealth Creation: Beating inflation" for my earlier blog posts on the topic.

14 comments:

Zi Rong said...

I'm seriously worried about the future of Singapore. It'll be increasingly difficult to find areas to generate growth for Singapore, especially with its very small land area.

With a population of about 5.5m, Singaporeans are already feeling the squeeze on the infrastructure and inflation. I can't imagine what it'll be like with a population of 6.5m as per PAP's target - Housing will be very, very expensive, it'll be impossible for average joes to own a car, and everyone will be struggling to keep pace. There'll certainly be more foreigners than Singaporeans in 5-10 years time.

I certainly don't want my child to grow in such environment.

AK71 said...

Hi Zi Rong,

Perhaps, having a short period of recession won't be such a bad thing, you think? ;)

Of course, we could end up with stagflation which is worse. :(

While we cannot say with certainty what Singapore will become in future, we can try to guard our wealth from dwindling due to higher than normal inflation.

Do what we can, the rest is up to the heavens. :)

Cory said...

Maybe using exchange rate to control currency do not works this time round. Yes, Singapore probably needs a recession to right things up.

Howyuan said...

Inflation is somewhat linked to population growth. Singapore is importing far too many foreigners, bringing inflation in. Imports also brought along excessive and unnecessary cultural "diversity".

I agree that a short recession can be useful. Just like leaves fall during autumn and grow afresh during spring.

AK71 said...

Hi Cory,

Although a recession is likely to hurt many people, more and more, I am hearing from friends that they would not mind having a mild recession for a while. This is the extent of the frustration that is being felt on the ground.

I personally do not know how a mild recession would affect the average Singaporean now. Wage freeze, wage cut or retrenchment? I would be careful with what I wish for. :)

AK71 said...

Hi Howyuan,

Your views are probably representative of many Singaporeans'.

With our small and shrinking native population, accepting foreigners is necessary but I do agree that we have expanded our population too rapidly. A more moderate expansion would have avoided many of the problems today.

I see you are also in favour of a short recession. Let's see if it happens and if it would bring some benefits. :)

JJ said...

Dear AK71,
Do you know which bank has the best interest rate? Very peanut hor? Where should I park my fund, really need your good advice to pick up some good counters to invest. Pls help me. Tks!

AK71 said...

Hi JJ,

They are all peanuts but for FDs, I believe Maybank currently has the best rates. This is just from my own observation and not backed by research. ;p

Most of my money is parked in S-REITs. Their prices are pretty high now but with distribution yields of 6 to 8%, they will continue to be attractive to many investors. :)

EY said...

Hi AK,

From the social perspective, I do not wish for a recession. Already heard that big semi-con companies have started a fresh round of retrenchment. Those retrenched would find it hard to get another job when they have no other skills that are in demand. Livelihoods will be at stake. Their pain is probably not something which we can completely empathise. I would rather forgo whatever benefits (investment opportunities included) which a recession can bring and hope those hardworking folks would have bread on their table. A short recession may seem rather harmless but the anticipation of it will already drive companies to take action.

Oh, btw, I'm not sure if it only happens to my computer. When I click your webpage link in my Favourites folder, my antivirus immediately pops up and detects 4-5 virus attacks. The name of the virus is 'Trojan.Maljava!gen23'. I tested it out a few times to confirm and it seems to only happen to your weblink. :(

Maybe some brilliant hacker is plotting to 'silence' me or you?!?!?! Hahaha.

Cheers,
Endrene

AK71 said...

Hi Endrene,

Most important thing first. I have Norton 360 installed on my PC and I don't have the problem you described. I hope yours is the only case! I am an IT idiot and I don't know what is causing the problem in your case. :(

I do not wish for a recession too although I do know many people who are wishing for one in order to buy stocks cheap. We only have to go to the cbox at "Bully the Bear" to witness this. Terrible, isn't it?

Structural unemployment is the worst kind of unemployment. I agree with you. At least my friends who were formerly investment bankers have been able to find jobs in finance although they had to take big pay cuts in the process.

EY said...

I deleted the original link from my favourites folder and cleaned up the browsing history. Then save your weblink into favourites again. No more bugs now! :D

Hope there won't be anymore virus attacks. I can't handle beyond this. Pretty much an IT idiot too!

AK71 said...

Hi Endrene,

What you have done is already magic to me! hahaha... I am glad you fixed the problem. :)

EC said...

Well a recession will definitely hurt some people while benefit some people - depending on what one's vested interests are.

However if we indeed have a housing bubble then it might be better to deflate it sooner rather than risking a larger burst in the future? I am no expert on this but I just feel that property prices cannot keep rising without repercussions.

The recent trend of sustained inflation coupled with stagnant wages esp. for the lower income is certainly making life harder for people.

Eugene

AK71 said...

Hi Eugene,

I think a recession will only benefit the rich. :(

Millionaires usually emerge from bear markets richer.

As for the sky high prices of real estate, many are saying that prices will never come down and that real estate is where we should park our money. I cannot help but feel that this is an indication that we are in a bubble.

The ultra low interest rate environment is driving people to seek higher returns. It is very cheap to borrow and savers are penalised.

With all the unsold inventory of private non-landed residential real estate, rising vacancy rates and even more completions in the years ahead, something has to give.

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