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UNDERSTANDINGINFLATION
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INFLATION
It can be a
complicated
concept. Let us
begin...with a
denition.
in
a
tion (in-!-sh"n), n.
a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the losss of value of currency.
$$$
Time
Essentially, it means
stuff costing more
over time.
But...is it that
simple? What
are its effects?
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Ination is often
villied.
However, it is
more
complicated
than that.
I am pretty sure
you would have
heard all the
horrors about
ination and
how it will EAT
your
investments.
IN
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Let us take a
look at how it is
measured..
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It collects information
of like prices of these
items every month.
The government then
averages and weighs
t hese pri ces usi ng
various formulas.
The result is a number
called the Consumer
Pr i ce I ndex ( CPI ) .
T h e C P I i s a
measurement of how
much stuff all around
us costs us. The last
CPI me a s u r e d i n
S e p t e m b e r i n
Singapore is 109.3.
So what does
CPI have to do
with ination?
Generally, CPI is
an indicator of
ination. When it
increases, ination
increases
accordingly.
However, there are
a range of other
measured indices
as well.
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The government
h a s a l o n g
shopping list of
i t e m s a n d
services.
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So is ination
bad? It means I
have to pay
more for my
stuff!
It can be. But it
all depends on
the situation. If
ination is 3%
and you have...
...$100 in a milo tin, it will be
worth $97 after a year.
MILO TIN
$$$
$$$
$$$
$$$
MILO TIN
$$$
$$$
$$$
$$$
$$$ $$$ $$$
$100 $97
Ination IS bad.
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UNDERSTANDINGINFLATION
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...$100 in an investment with
a 4% return, the investment
will be worth $101 after a
year. The real rate of return is
only 1%
INVESTMENT
$$$
$$$
$$$
Ination is bad, but it
is manageable
through investments.
INTEREST
What you
think you get.
What you get.
What ination
gets.
$$$
$$$
$$$
$$$
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UNDERSTANDINGINFLATION
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...a $100 loan from the bank
with a xed interest rate of
2%, you will owe the bank
$102 after a year. However, it
will only be worth $99. This
means that ination paid $1
of your debt.
Ination, in this case,
IS good.
$100 before ination.
$97 after ination.
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UNDERSTANDINGINFLATION
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Ok. If I owe money, ination works to my
advantage! But too much of it cant be good right?
Yes. There will be effects of unanticipated or
excessive ination.
Uncertainty about what will
happen next makes corporations
and consumers less likely to
spend. This hurts economic
output in the long run.
When prices are constantly
changing, energy and money is
diverted to keeping the prices
updat ed, whi ch cr eat es
inefciencies.
Lenders (like banks) are then less
likely to make loans if they cannot
accurately adjust the rates to make
up for ination.
Individuals with pensions or xed
income will see a decline in their
p u r c h a s i n g p o w e r a n d ,
consequently, their standard of
living.
If the ination rate is greater than
that of other countries, domestic
products become less competitive.
People hoard tangible items as a
way to shed excess cash before it
is devalued. This creates shortages
of hoarded items.
Hyperination can occur when a currency loses its value so rapidly that the very
concept of currency becomes meaningless. This results in the issuing of trillion dollar
bills. The economy
If you can see by now, ination
is inevitable. It is a sign of a
growing economy and
afuence of the people. To
avoid ination, investors often
convert assets from money to
capital projects, thus in turn
creating even more growth.
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UNDERSTANDINGINFLATION
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RATE OF INFLATION
TOO MUCH
TOO LITTLE
SWEET SPOT
High prices
Hoarding
Hyperination
Risk of deation
Liquidity trap
High unemployment
Stable and
predictable economy
Ok. So ination
is not inherently
bad. But how do
we get it? What
causes it?
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UNDERSTANDINGINFLATION
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The economy is good.
Companies employ more
people.
W h o m a k e
mor e money
and buy more
stuff.
To meet the demand
f o r mo r e s t u f f ,
companies employ
m o r e p e o p l e .
Eventually,
The demand for stuff will
out-pace the capacity to
produce it.
The price of stuff goes
up.
T h i s i s t e r me d a s
Demand-Pull Ination.
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$$$
$$$
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Ther e i s subst ant i al
increase in the cost of a
good or service.
Such as a disruption in
the oil supply.
Price of oil goes up.
The price of goods and
services that rely on oil
goes up.
This is termed as Cost-
Push Ination.
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$$$
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UNDERSTANDINGINFLATION
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Due to ination in the
past, people now expect
ination to occur.
Workers push for higher
wages t o of f est t he
expected ination.
Employers pass on the
higher wage costs to the
consumer.
The price of stuff goes up
and ination occurs.
This is termed as Built-In
Ination.
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Current
Ination
Rate
Demand-Pull
Cost-Push
Built-In
These 3 denitions form the
current ination rate that we
know of.
What about
money supply?
The government needs to pay
for stuff it cant afford.
Prints extra money.
M o r e m o n e y i n
circulation
Value of money goes
down.
Prices are raised to
compensate.
Ination happens.
It affects too! When the
government prints money or
relaxes credit, this is a form
of Demand-Pul l , but i t
generally happens in a really
bad economy.
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T
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Higher Ination
Lower Ination
Slowing
Economy
Growing
Economy
UNDERSTANDINGINFLATION
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So...can if
ination gets out
of hand, what
can be done?
Controlling ination lies mostly with the
Monetary Authority of Singapore (MAS).
It is a delicate balance between keeping
the economy moving and keeping
ination in check.
Higher Ination
Lower Ination
Slowing
Economy
Growing
Economy
MAS
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The economy can be spurred in this
manner, but it will inevitably risk ination.
Or ination can be slowed, at the
expense of a slower economy.
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Higher Ination
Lower Ination
Slowing
Economy
Growing
Economy
UNDERSTANDINGINFLATION
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Ok...a quick recap! Ination ocurrs when
the price of stuff goes up. It is not always
bad. However, too much or too little of it
will spell trouble for the nation. The main
causes of ination relate to the demand
and costs of goods and services. The
Singapore government can affect ination
by raising or lowering interest rates!
MAS
Modest Rates Modest Rates
Generally, the Singapore government
will try to keep it balanced.
Spot on!
And since ination has to occur and it is
not a constant, we must constantly be on a
look out for investments that will keep our
money growing.
At GIANTS LEARNING TECHNOLOGIES,
we specialise in equipping our clients with
the knowledge, skills and opportunities to
nancial instruments such as market
stocks and shares, mutual funds, real
estate, and FOREX.