Saturday, November 17, 2007

Inflation Hitting 5% in 2008 ?

It is with considerable horror and trepidation that I picked up today’s edition of “Weekend Today” newspaper and saw the headline on the front page stating that Trade and Industry Minister Mr. Lim Hng Kiang had commented (in Parliament) that inflation is expected to hit a historical 25-year high of 5% next year ! As the paper mentioned, it was only on October 30, 2007 that MAS mentioned that inflation would hit 4%; his comment on 5% would mean a 25% increase over the 4% forecast, which is shocking to say the least. This would mean that an item costing S$10 would cost S$10.50 by next year (5% increase) if this scenario came to pass.

As readers may know, the concept of inflation has been around for the last couple of hundred years, but it only came to greater prominence with the development of economic theory by the great Nobel Prize Winners John Maynard Keynes and some other important people (of which I will not bother dredging the names of !). Simply put, inflation is what happens when the prices of goods and services increase; meaning that the same dollar can buy less goods over time. This has a lot to do with aggregate demand and aggregate supply, but since this is not an economics 101 class I will spare readers the details and dive straight into the implications.

Inflation is part and parcel of the growth of an economy and cannot be distinctly separate from it. As long as there is economic growth and GDP growth, there is bound to be some measure of inflation. In fact, economists believe that steady inflation is actually healthy for an economy, as it shows that the entire economy is becoming more healthy and that people have a greater propensity to spend. Chronically high inflation or the opposite of inflation (i.e. deflation) is not healthy as the former situation signals the fact that price is increasing too quickly for the common man to cope with, resulting in decreased consumption and hence slower growth; while the latter scenario has occurred in Japan over the last decade, and caused businesses to suffer a result of decreased prices. So the general argument would be that inflation is necessary and healthy, so why is there such a hue and cry over the recent 5% announcement? Perhaps it is because 5% is seen as a threshold which is bordering on “high” instead of “healthy”. Traditionally, for Singapore, inflation has held steady at between 2.5% to 3% per annum, and most of the time real wages have also increased by between 3-5% (including in the civil service) to keep pace with this inflation. If inflation really hits 5%, then real wages may not increase enough to compensate this increase in inflation, even though nominal wages are increasing (real wages are what economists refer to as “inflation-adjusted wages”, while nominal wages are the simple dollar value of wages without accounting for inflation). This would inevitably cause hardship to the lower income families and retirees who may find the cost of basic necessities like rice, bread and water rising.

In fact, some recent personal examples I can quote of evidently rising prices include a trip to Old Chang Kee (who, incidentally, are considering a listing on SESDAQ). A normal curry puff there used to cost S$1, but now it’s S$1.10. When quizzed about this apparent 10% increase in price, the staff just gave me a blank look as if I were an idiot asking obvious questions. Another lunch visit to a nearby café close to my office made me discover that my favourite curry chicken rice had “inflated” from S$4.50 to S$5.00. A quick query on the sudden price increase of 11.1% was met with “my boss told me to adjust the price, go ask him !”. I have not been to the supermarket recently but I am sure the same might be happening in NTUC Fairprice, Cold Storage, Carrefour and Giant. I would appreciate if readers can give their feedback on whether this is happening (i.e. rising prices of basic goods).

So what can the common man on the street do to counteract the effects of this inflation ? Putting your money in a bank is obviously the worst way of growing it, as most banks give interest rates ranging from 0.25% per annum (POSBank) to 1.68% per annum (Maybank iSavvy account). Even fixed deposit rates do not get more attractive than 2.25 to 2.5% per annum unless it is a foreign currency time deposit (which will then be subjected to currency risk as well). The most logical solution would be to purchase a high yielding equity such as a REIT, some of which promise yields as high as 7% (e.g. Saizen REIT) or to purchase equities in companies at a decent margin of safety. Thus far, I have a REIT which yields about 7.5% dividend yield at my 2004 purchase price, as well as some companies which are paying a 5% dividend yield at my purchase price. Other suggestions from readers on how to combat inflation will be most welcome !

Note: Just yesterday, on November 16, 2007, I saw value emerging in China Fishery Group (CFG) and purchased a couple of lots at a price of S$1.54, which I feel offered a decent margin of safety. I will detail the reasons and rationale for purchase as well as computations of expected growth and risks of my investment in a subsequent posting.

10 comments:

Ng said...

I'm surprised you are by this number. if you have done your fair share of marketing you would have realise it is MORE than 5%.

this is the fact of government. they win election and tax the people so that they can get money to execute their promises.

I urge you tune in to some of FSN's broadcast. it will give you an idea of inflation
FSN News hour

regards.

musicwhiz said...

Hi ng,

This number was provided to me from the newspapers and I am just reporting it as such. I do realize, of course, that real inflation on the ground is far more than 5% as I stated in my post that even curry puffs have increased prices by 10% ! I will not comment on the difference between what the government tells us and what is really happening as mine is just a blog for discussion on financial issues, not political issues.

Thanks for the link, though.

Regards, Musicwhiz

Anonymous said...

hi!

i do observe the same as you have. the old chang kee curry puffs went mysteriously higher. most of the times they will give cost of goods as the reason. flour prices etc.. another way of seeing inflation is the ever increasing bus fares. just this year alone it has gone up a few times.

I also agree to the reits thing. My mom has 100k to invest and I took merely 4o% so that i can average down in future if the stock market goes deeper. I went into MIIF and First REIT, prefering them over retail reits. Yield is between 8-9%. BBSFF gives higher yields but their business structure is too complicated for me to understand.

Another 20k went into hsbc under HSI to buy 2 lots. Lowest PE among banks comapred to DBS/uob etc, and has already gone through its problems wth the CDOs (in terms of announcements over exposures) and is fairly resistant to volatility. I foresee growth and a current price that is attractive.

--charlesming

musicwhiz said...

Hi charlesming,

I guess higher flour prices are here to stay, thus bread, cakes and other confectionary will see their prices heading north in time to come.

Thanks for sharing your experience with REITS. I guess for me, one REIT is enough for my portfolio; as I want to concentrate on growth companies which offer value as well as a decent yield.

Regards, Musicwhiz

fishman said...

Hi musicwhiz,

One solution from me is to ask your boss for a bigger pay! (heh heh I couldn't resist it!)

What a paradox! Better economy should mean better pay, better livers. But it actually brought along price increase. Then are we any better than a few years back when economy was bad??!! Hai...Really can appreciate why Graham dedicate an entire chapter on this topic!

Personally I think REIT is good. But like you said, just a portion will do!

cheers!
fishman

Derek said...

Hi,

I have set up a new site (http://thefinance.sg) to house the articles of various local bloggers.

Can I have your permission to have your articles in my blog. Of course, I will credit the work to you and also link back to your blog.

Cheers
Derek

musicwhiz said...

Hi fishman,

haha yes it would be niec if my boss could give me a pay rise, like to the tune of 40-50% (yeah I wish !) Hahaha...

I guess price increases are supposed to be accompanied by salary increases but most of the time, salaries don't go up but the work to be done does ! That's life I guess, we all have to live within our means.

Regards, Musicwhiz

musicwhiz said...

Hello Derek,

Sure. You can go ahead and I appreciate the effort to consolidate the articles. Will visit your site once in a while to read the articles too.

Regards, Musicwhiz

Aspellian said...

MW, nice article. Agree that inflation is definitely more than 5%. Petrol prices have increased by >20% in the past year alone. GST increase in 2007 is already 2%. For those who take public transport, bus fares have also increase by 1.8%.

The lower income pple will really be hard-hit esp. so as they may not be savvy investors and have money mainly in banks (if they have excess $$ in the first place). as a result, you will see widening income gap as a nation grows and develops.

Which is why financial knowledge and its correct application to the real world is very important. . .

aspellian

musicwhiz said...

Hello aspellian,

Yep almost everything has increased in price, and basic food and items will increase further come 1 January 2008 as food costs have not been adjusted yet. It is getting difficult to be able to save money on basic necessities if this goes on, but that's life and inflation is part and parcel of it.

Knowledge on how to grow one's money in order to beat inflation should be the cornerstone of financial education in schools. Sadly, this is not so currently.

Regards, Musicwhiz