Understanding Inflation (Part 1)
I was explaining the workings of variable annuity to a young couple recently, the gentleman asked: “Allen, what is your view of inflation (in Singapore)?”
Indeed, inflation is an important assumption for retirement planning. An overly optimistic figure (low inflation) would lead to an acceptance for a lower expected investment portfolio rate of return (with lower investment risk); on the other hand an overly pessimistic figure (high inflation) would lead to an acceptance of a higher investment risk to generate the required portfolio rate of return.
In a more serious note, un-controlled inflation could lead to social unrest and toppling of existing government. In 1949, Chiang Kai-shek did not lose China to Mao Zedong because of inferior military might, Chiang lost the right to govern because of (un-controlled) inflation afflicting millions of ordinary folks. Price situation were so bad that many folks could not afford ordinary goods and food items. These folks then decided to support Mao and his party. Much blood were shed in that process.
Let me explain how inflation is computed in Singapore (officially). The department of statistics computes the average change in price of a basket of goods and services commonly purchased by the majority of households over time. It is classified into 7 main groups: Food (23%), Clothing & footwear (4%), Housing (21%), Transport (22%), Education & Stationery (8%), Healthcare (5%), Recreation & others (17%). This figure is commonly known as Consumer Price Index (CPI). The current inflation factor is around 6%.
It is also important to understand that Singapore practically import most of its goods and raw materials for domestic consumption. Therefore, whenever there is a price hike in commodity or food items (i.e. oil & rice), this increase will also be “imported” into Singapore. This is exactly what’s happening to the current inflationary situation.
Indeed, inflation is an important assumption for retirement planning. An overly optimistic figure (low inflation) would lead to an acceptance for a lower expected investment portfolio rate of return (with lower investment risk); on the other hand an overly pessimistic figure (high inflation) would lead to an acceptance of a higher investment risk to generate the required portfolio rate of return.
In a more serious note, un-controlled inflation could lead to social unrest and toppling of existing government. In 1949, Chiang Kai-shek did not lose China to Mao Zedong because of inferior military might, Chiang lost the right to govern because of (un-controlled) inflation afflicting millions of ordinary folks. Price situation were so bad that many folks could not afford ordinary goods and food items. These folks then decided to support Mao and his party. Much blood were shed in that process.
Let me explain how inflation is computed in Singapore (officially). The department of statistics computes the average change in price of a basket of goods and services commonly purchased by the majority of households over time. It is classified into 7 main groups: Food (23%), Clothing & footwear (4%), Housing (21%), Transport (22%), Education & Stationery (8%), Healthcare (5%), Recreation & others (17%). This figure is commonly known as Consumer Price Index (CPI). The current inflation factor is around 6%.
It is also important to understand that Singapore practically import most of its goods and raw materials for domestic consumption. Therefore, whenever there is a price hike in commodity or food items (i.e. oil & rice), this increase will also be “imported” into Singapore. This is exactly what’s happening to the current inflationary situation.
Like it or not, inflation is a (negative) by product of a growing economy. The logic is simple; things become more expensive when demand of goods is more than supply. During economic growth, the demand generated by affluent usually outrun the supply, hence the price increase. The demand of oil (or energy) by India and China is one factor of the current oil price hike.
posted by Allen Lim @ 1:41 AM
0 Comments:
Post a Comment
<< Home