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Inflation, Investing and Everything

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Saturday March 08, 2008

ABC Guide to Beating Inflation in Singapore and Elsewhere, Part 1

This is the first of a 7-part series on how to beat inflation in Singapore or just about anywhere else for that matter. As inflation takes off and goes exponential worldwide, individuals and investors alike will need to develop personal strategies to cope with and to fight this insidious enemy that is inflation, which reduces the purchasing power of the money that you have every hour, every minute, and every second of every day.

It does not matter whether you are rich, middle-class, or poor, it is more of a matter of degree. The wealthy will rightly worry about the value of their assets in an inflationary environment. With a high-enough inflation rate, even the rich can get wiped out, if they do nothing to preserve their assets - just take a look at Zimbabwe, where a banana now costs more than what a house used to be.

If you are a middle-class person, congratulations, you are part of the most rapidly disappearing section of the population. If you carry on with life as per normal, then as inflation takes its toll, your lifestyle will be no longer be what it used to be. You will find that things are getting more and more expensive, while your income does not seem to be able to catch up. You will find yourself falling further and further behind. Little luxuries that you used to be able to afford, like, say, dining out regularly at restaurants, or going for a family tour every now and then, will start to slip out of your grasp. You will start to cut back on your expenses, only to find that even that is not enough. You will find that things you need, whether it is food, transport, education, or healthcare, will take up a bigger and bigger chunk of your monthly budget, squeezing out everything else until, it seems, you no longer have room to breathe. This is what inflation can, and will, do to you.

If you are not so well-to-do, it will not get much simpler than this : as inflation takes off, the fight against inflation will literally be a fight for survival. Let's take food for example. For the middle-class folks in a middle-class society such as America or Singapore, the cost of food typically takes up around 10-15% of the total monthly income. If the cost of food doubles, this ratio goes up to 20-30%. But for the poorer folks, whose food expenses take up one-third to one-half of the total income, with rental and utilities taking up the rest, and with no further room to cut back on expenses, what happens when the cost of food doubles? Life will get very hard, very quickly. You will have to make some extremely hard choices : do you want to eat, or do you want to pay the rent - and what about the utilities?

So as you can see, no matter what economic class you are in, we have the same common enemy : inflation. Here's my A-Z guide on how we can fight inflation. I hope it helps.

Awareness.

If you have landed on this page, whether from a search engine query, or from some other link, you are already aware that you need to do something about this inflation problem. As they say, being aware is half the battle won. Now is the time to fight the other half.

Aggressiveness. Attitude. Ability.

You cannot enter into a fight half-heartedly and expect to emerge victorious. It is the same in the fight against inflation. You must be aggressive. Don't say things like, "oh, it will go away eventually" or "oh, there's nothing I can do about it". You must have the right attitude and believe you can beat this thing. And as for your ability to win this war, it is a function of the resources available to you and the skills that you have. All the best in this regard. Now, let's get on with it.

Buy Nothing. Or Buy Less. At the very least, Buy Wisely.

From time to time, the shopping malls will hold sales. Maybe it's 10% off, maybe it's 20% off. But the way I see it, if you don't buy something, you will save 100%. So before you rush off to buy something, think about it. Do you really need it? Can you save 100%? The next best thing you can do is to buy less. Inflation simply cannot hurt you if you do not buy, and it will hurt less if you buy less. But then again, if you have to buy something, buy wisely. It does not make sense to buy, say, a cheapo pair of shoes if it does not last you even one year. Buy a good pair, and make it last. I wore my previous pair of Clarks shoes for five years and the soles were threatening to spring leaks before I reluctantly parted with it for a new pair.

Barter Trade.

As the price of goods and services go higher and higher with no end in sight, people might find it worthwhile to engage in barter trade, which lies outside of the economic system and its crazy prices. As Wikipedia puts it : Barter crosses over to the spheres of trade with money when economies are suffering from a very unstable currency (as when hyperinflation hits). It could be anything : a daily ride to work for your neighbour's husband in exchange for her help in doing accounting for your small home business, or fixing your friend's cousin's computer in exchange for a couple of anime DVD's that you'll have trouble importing yourself because of high shipping costs. As inflation takes off and goes into hyper-inflation, this kind of thing could become more and more common. And now that we have the Internet, as compared to the bad old days, entire barter marketplaces could spring up.

Cash. Currency.

Six words : Get The Hell Out Of Cash. Okay, a bit more on that. Treat cash and currency as what it is - a medium of exchange, nothing more. The way it is being inflated away, cash is certainly not a store of value. Keep just enough of it around for your daily transactions, and maybe a small buffer to tide you over in case of emergency. The exact size of the buffer depends on your comfort level, maybe 3 to 6 months worth of expenses. Try to keep as little cash as you can in your wallet (0% interest), or in your savings account (0.25%), or in fixed deposits (1%+). You could keep some emergency funds in money market funds (1-2%) but that's it. Look to invest the rest of your money in stuff that will give you higher returns. The race is on. As of Jan 2008, the official Singapore CPI inflation rate is 6.6% - you have to beat at least that. For myself, I am setting a slightly higher standard. I benchmark my investment performance to the M3 money supply growth rate - which can be between 14% to 23% per year.

Consolidate Errands.

When you go off downtown, or go anywhere else which involves transport expenses, it would be wise to consolidate your errands. Try to plan your trips such that you accomplish more than one thing at a time. It will take some planning and good timing to pull off, but you will become a lot more efficient, and save both time and money.

Cooking.

Those of you who cook, or are fortunate enough to have someone cook for you, you know first-hand that it is a lot cheaper to cook than to eat out. Still, there are some ways to cut down expenses further when cooking - for example, try recipes that do not need a long time to heat things up, or to boil and simmer for hours - which uses a lot of gas. Try getting an induction cooker, which runs on electricity and is 90% efficient in terms of energy usage (as in conversion to heat), as compared to the usual gas cookers, which are only about 50% efficient. As gas and electricity prices rise in tandem (80% of Singapore's electricity comes from natural gas anyway), you will find that this price differential will widen further.

CPI.

CPI stands for Consumer Price Index. It is a weighted average of various prices in a basket of goods and services and it is regularly compiled by the government, and it is what you see being reported in the news media. When they say, for example, inflation in Singapore is at 6.6%, CPI is what is being reported. However, you must take the CPI figure with a grain of salt - perhaps more than a grain. I'm talking about 5-kg bags here. As inflation takes off, the reality of actual street prices and the inflation rate as reported in official CPI figures will begin to diverge more and more. This is because the CPI calculation is a complex process, and is subject to more human interpretation than you might have imagined. Besides, CPI is a political figure. What I mean by that is simply this : there is every incentive amongst the governments of the world to report a lower CPI figure, in order to try to hide the actual rate of inflation. As the real rate of inflation takes off, governments have to come clean eventually regarding their official CPI figures, or they will end up like Zimbabwe's case, where the government has been reporting 8,000% CPI inflation whereas an independent IMF study has concluded that the actual rate of inflation is closer to 150,000%.

- Okay, we'll stop here for now. I hope you have found this useful. Keep posted for further updates to this A-to-Z guide on fighting inflation.