Prices rising while your pay stays the same?
It’s a frustrating reality we all face.
But did you know that inflation doesn’t just affect how much you spend on groceries – it also impacts your savings, investments, and even your financial future?
In this post, you’ll learn:
- What inflation is and the types you should know about
- How inflation quietly chips away at your finances
- Surprising ways inflation can actually work in your favour
- Practical tips to shield yourself from rising costs
Let’s dive in and uncover what you need to know!
What is inflation?
Inflation is the rate at which the general price level of goods and services in an economy rises over a specific period.
Sounds straightforward, right?
Sort of, yes.
Let me give you an example – let’s say that the inflation rate is 3%.
This means that, on average, prices are becoming 3% more expensive yearly.
How is inflation measured?
Inflation is measured using indices that track price changes in a “basket” of goods and services over time.
These indices aim to capture the cost of living for the average consumer and provide a snapshot of how prices evolve across an economy.
By monitoring inflation, policymakers can make informed decisions to maintain economic stability and protect purchasing power.
The formula for calculating the inflation rate is straightforward:
Inflation rate = {(Final CPI – Initial CPI)/Initial CPI} x 100
For example, if the CPI was 200 at the start of the year and rose to 210 by the end, the inflation rate would be:
Inflation rate = {210 – 200)/200) x 100} = 5%
This means prices increased by 5% over the year.
Types of inflation & what causes it
Core inflation
Core inflation is the measure of inflation that excludes the prices of highly volatile items like food and energy.
This is because these prices can swing wildly due to factors like weather, natural disasters, or geopolitical events, and they often don’t reflect the underlying, long-term trends in an economy.
Think about it: if energy prices spike because of a sudden oil supply disruption, it doesn’t necessarily mean the entire economy is overheating.
Core inflation removes these outliers, allowing policymakers – or in the context of Singapore, the Monetary Authority of Singapore (MAS) – to focus on the broader trends that impact the economy’s stability.
Demand-pull inflation
Demand-pull inflation happens when there’s more money floating around than there are goods and services to buy.
Think of it like this: if everyone suddenly wanted the same limited-edition sneaker, sellers would start charging higher prices because they know people are willing to pay more to secure a pair.
This type of inflation is often seen in booming economies, where consumer confidence is high, businesses are thriving, and people have more disposable income to spend.
Governments or central banks can also unintentionally cause demand-pull inflation.
For instance, when they implement expansionary monetary policies – like lowering interest rates or pumping money into the economy – it can boost spending.
While this is great for stimulating growth, it can also create upward pressure on prices if the supply side can’t keep up.
Cost-push inflation
Cost-push inflation happens when the cost of producing goods and services increases, forcing businesses to raise prices to maintain their profit margins.
It’s like when your favourite prata stall starts charging more – not because demand has surged but because the cost of flour or oil has skyrocketed.
This type of inflation can be triggered by various factors, including rising wages, higher raw material costs, or even disruptions in the supply chain.
Built-in inflation
Built-in inflation is like a cycle that feeds itself – a wage-price spiral.
As the cost of living rises, workers demand higher wages to keep up.
Employers, in turn, raise prices to cover these increased labour costs, pushing living expenses even higher.
And so, the cycle continues.
Imagine this scenario: the price of essentials like groceries, transport, and housing goes up.
Naturally, you’d expect a pay raise to maintain your lifestyle.
However, as businesses pay higher wages, they need to offset the costs by increasing the prices of their goods and services.
This creates a loop, where wages and prices keep pushing each other upward.
Hyperinflation
Hyperinflation is inflation on steroids – a rapid and out-of-control rise in prices that can devastate an economy.
Imagine waking up to find the price of a loaf of bread has doubled overnight.
That’s the reality of hyperinflation, where prices can soar by over 50% per month, leaving money virtually worthless.
This extreme form of inflation usually stems from a government losing control of its money supply.
For example, when central banks print excessive amounts of currency to cover debt or fund spending, they flood the economy with cash – something like Venezuela in 2018.
The result?
A sharp decline in the currency’s value, with skyrocketing prices.
Stagflation
Stagflation is the toxic mix of stagnant economic growth, high unemployment, and high inflation.
Unlike regular inflation, where rising prices are often linked to a booming economy, stagflation gives you the worst of both worlds: prices climb while the economy grinds to a halt.
This phenomenon typically stems from 2 main culprits: supply shocks and poor economic policies.
Reflation
Reflation is like giving the economy a gentle nudge to get it back on track.
It’s a deliberate, temporary increase in inflation, implemented through policy measures like lowering interest rates or boosting government spending.
The primary goal of reflation is to kickstart growth after a period of economic stagnation or deflation (when prices fall and economic activity slows).
Monetary inflation
Monetary inflation happens when there’s simply too much money circulating in the economy.
Central bank are the key players here, as they control the supply of money.
This type of inflation often stems from actions like printing more money or reducing interest rates.
While this can stimulate economic activity, it can also lead to inflation if the money supply grows faster than the economy can handle.
Structural inflation
Structural inflation arises when deep-rooted issues within an economy limit the supply of goods and services, causing prices to rise.
Unlike temporary inflationary spikes, this type stems from inefficiencies that are baked into the system.
The causes can vary, but common culprits include inefficient production methods, supply chain bottlenecks, or monopolistic practices.
Imported inflation
Imported inflation happens when the rising cost of goods and services from abroad drives up prices domestically.
In a highly globalised economy like Singapore, where much of what we consume – think food, fuel, and raw materials – is imported, this type of inflation is particularly relevant.
The 2 main culprits behind imported inflation are currency devaluation and rising global prices.
When a country’s currency weakens compared to its trading partners, it costs more to buy the same goods.
How can inflation hurt you?
Reduces purchasing power
The most immediate effect of inflation is that your money doesn’t stretch as far as it used to.
Over time, this erosion of purchasing power can force you to make tough choices – cutting back on dining out, delaying big purchases, or stretching your monthly budget just to make ends meet.
Even small price increases can add up, especially for essentials like food, transport, and utilities.
Hurts fixed-income earners
Inflation is particularly harsh on those with fixed incomes, such as retirees living off pensions or savings.
If your income doesn’t adjust for rising costs, you have less buying power yearly.
For example, a retiree in Singapore relying on CPF payouts may struggle to maintain the same standard of living as inflation pushes prices higher.
Creates economic uncertainty
Inflation doesn’t just impact individuals; it can shake up the entire economy.
When prices rise unpredictably, businesses face uncertainty about costs, making it harder to plan for the future.
This can lead to reduced investments, slower job creation, and, in extreme cases, slow economic growth.
For you, economic uncertainty might mean fewer job opportunities, slower wage growth, or a dip in consumer confidence.
It’s a ripple effect: as businesses struggle, the economy can lose momentum, creating a challenging environment for everyone.
Erodes savings
The money you’ve worked hard to put aside loses value over time if the interest you earn doesn’t keep up with rising prices.
For instance, if inflation is running at 4% annually and your savings account offers just 1% interest, you’re effectively losing 3% in purchasing power each year.
This is why I always recommend to factor in inflation when planning for your retirement – it’s so that you have enough even after inflation erodes your purchasing power.
Leaving money idle in low-yield savings accounts may feel safe, but it won’t protect you from the slow but steady erosion of value.
Wage-price spiral
Inflation can also trigger the infamous wage-price spiral, where rising costs lead workers to demand higher wages.
While wage increases may seem like a solution, they often push businesses to raise prices further to cover these higher labour costs.
This creates a feedback loop, where wages and prices continuously chase each other upwards.
For you, this means any pay raise you receive during inflationary times might not improve your standard of living.
Impacts competitiveness
Inflation can hurt a country’s economic competitiveness, especially in global markets.
When domestic production costs rise due to higher wages, raw material prices, or operating expenses, the cost of local goods increases.
As a result, these goods become more expensive compared to those produced in countries with lower inflation.
For Singapore, an open economy reliant on trade, maintaining competitiveness is vital.
If inflation pushes export prices too high, it could weaken demand for locally produced goods, impacting industries and jobs.
But inflation isn’t all bad
Encourages spending and investment
Inflation can be a nudge to keep money moving rather than sitting idle.
When prices are expected to rise, people are more likely to spend or invest their money now instead of holding onto it.
This increased activity fuels economic growth, as businesses see higher demand and have more incentive to expand.
Eases debt burden
One of the most significant upsides of inflation is its ability to reduce the actual value of debt.
When inflation rises, the amount you owe becomes less burdensome in real terms – especially if your wages or income increase alongside it.
Essentially, you’re repaying old loans with money that’s worth less than when you borrowed it.
For borrowers, this can be a game-changer.
If you have a fixed-rate mortgage or student loan, inflation works in your favour by effectively shrinking the cost of your debt over time.
This is one reason why governments with high national debt sometimes welcome a bit of inflation – it makes paying off those debts more manageable.
Promotes economic growth
A steady level of inflation can be a sign of a growing economy.
Moderate inflation encourages spending, investment, and borrowing, as people and businesses anticipate rising costs in the future.
Instead of sitting on idle cash, individuals might purchase homes, start businesses, or invest in education, all of which contribute to long-term economic prosperity.
For governments, inflation also plays a role in maintaining fiscal health.
Tax revenues often increase with inflation as incomes and prices rise, enabling public investments in infrastructure and services.
A vibrant economy with manageable inflation creates a positive feedback loop, where increased spending fuels growth and supports employment.
Adjusts relative prices
Inflation helps to adjust relative prices across sectors, guiding resources to where they are most needed.
For example, industries facing higher demand can increase prices, signalling producers to invest more in those areas.
Over time, this natural price adjustment fosters efficiency and balances supply with demand.
In Singapore, where the economy relies on adaptability, such price shifts can ensure that scarce resources like labour and materials are allocated to high-demand industries.
For you, this means inflation can indirectly improve the availability and quality of goods and services in areas that matter most.
Boosts asset values
Inflation can be a boon for those who own tangible assets, such as property, stocks, or commodities.
As the general price level rises, the value of these assets often increases too, offering a hedge against the declining purchasing power of money.
Stock markets also tend to benefit from moderate inflation.
Companies can adjust their prices to match inflation, potentially boosting revenues and, in turn, share prices.
Similarly, commodities like gold, often seen as an inflation hedge, tend to rise when inflation rises.
Ways to shield yourself from inflation
Always review your budget
Inflation tends to creep into every corner of your expenses, making it essential to revisit your budget regularly.
Track your spending and identify areas where you can cut back or optimise.
I personally use our Financial Toolkit to help me with my budgeting.
I lay down all my expenses and budget in a single place before deciding if there are ways that I can optimise my spending.
For example, switching to store-brand groceries or reviewing my subscriptions can free up funds for essentials that are becoming more expensive.
This approach ensures that rising costs don’t disrupt your ability to cover essentials like housing, food, and transport.
A well-structured toolkit can make financial planning easier, even during uncertain times.
With tools to track spending, evaluate investments, and project future costs, you’ll have a clearer picture of how to manage your money effectively.
Ask for a raise
Inflation doesn’t just increase prices.
It also erodes the value of your income.
If you haven’t had a pay review recently, now might be the time to ask for one.
Highlight your contributions at work and the rising cost of living to make your case.
Even a modest pay increase can make a big difference in helping you keep pace with inflation.
And if a raise isn’t feasible, consider negotiating other benefits, like flexible hours or additional perks, which can also improve your financial standing.
Look for a side gig
A side gig can be a fantastic way to bolster your income and counteract the effects of inflation.
Whether freelancing, tutoring, or selling handmade products, diversifying your income streams gives you more financial flexibility.
For example, platforms like Upwork or Fiverr offer opportunities to monetise skills like writing, graphic design, or coding.
If you enjoy teaching, consider tutoring students or sharing your knowledge through online courses.
Invest your money
Inflation erodes the value of money left idle, so investing is one of the best ways to shield yourself.
Look for investment options that outpace inflation, like stocks, real estate, or exchange-traded funds (ETFs).
These assets tend to appreciate over time, preserving and growing your wealth.
For beginners, consider diversifying your portfolio to spread risk.
For example, you could invest in a mix of dividend-paying stocks for steady income and growth-oriented funds for long-term returns.
In Singapore, Treasury Bills (T-Bills) are another option, offering a safe and inflation-resistant way to grow your savings.
Remember, the key is to start early and stay consistent.
How does inflation affect investments?
Inflation impacts investments in multiple ways, influencing both their value and returns.
For fixed-income assets like bonds, inflation can erode the purchasing power of the interest payments, making them less attractive, especially if their yields don’t keep up with rising prices.
This is why you always need to make sure that your investments outperform inflation.
So if inflation is 3% this year, your investments must perform at least 3% – otherwise you’re essentially “losing money”.
Conclusion
Inflation can feel like an invisible force chipping away at your hard-earned money, but it’s not all bad – and it’s definitely something you can manage.
We’ve explored what inflation is, the different types like demand-pull, cost-push, and imported inflation, and how it’s measured.
We’ve also looked at how it impacts you – reducing purchasing power, eroding savings, and influencing investments – but also the surprising upsides, like encouraging spending, easing debt, and boosting asset values.
The key takeaway?
Inflation isn’t something you need to fear but should plan for.
Whether it’s reviewing your budget, exploring side-gigs, or making smarter investment choices, there are plenty of ways to stay ahead of rising prices.
Still feeling a bit overwhelmed?
Don’t worry – you’re not alone.
If you have questions or want to know how to safeguard your finances, why not chat with one of our trusted financial advisor partners?
It’s completely free, and they can help you understand how inflation affects your unique situation.
After all, understanding inflation is the first step to taking control of your financial future.
