Inflation: An Ally or Adversary?
Inflation is defined as the rate at which the general level of prices for goods and services are rising, and, subsequently, purchasing power is falling.
LAST month our average inflation rate is at 2.4 percent compared to previous months, as it is much lower in comparison to the 4.9 percent (in September 2014), according to the National Statistics Office’s consumer price index (CPI) data.
We see the improvement of our economy and that consumer prices, such as food, fuel, transport, water and electrical utilities and others, which influence the bulk of inflation, have lowered in recent months. What about your investments, personal savings, education fund for kids or even one’s retirement fund are inflation proof?
Inflation is defined as the rate at which the general level of prices for goods and services are rising, and, subsequently, purchasing power is falling. In recent years, we have seen how inflation affects the lives of our ordinary folks and the poor wherein they only buy in retail or tingi-tingi, or none at all. This has a profound effect on them, with rising cost of living but stagnated increase in modest wages of ordinary workers failing to keep pace in recent years and, at the same time, leaving people with less savings or no savings that are used totally for discretionary expenses even if there was an approved increase last month at P19 per day. But this is not enough, forcing them to be on debt or to borrow. Below is how inflation can play in both ways:
Inflation as an Adversary
It can eat up your savings, let’s cite an example: if ever you have different savings accounts in a bank, chances are it can only earn at least 1 percent to 2 percent per annum. Another example of inflation in transportation, a jeepney ride costs around P0.50 in 1986 for a 4-kilometer journey but in the current year, a ride of the same distance covers cost around P8, excluding the discounts for passengers (who are elderly, person with disabilities and students). Last example are the fixed-income earners, such as retirees or elderlies, who earn through their pensions from the Social Security System or Government Service Insurance System after their retirement with no definite retirement fund. This can have profound effect on their daily spending for their health-maintenance needs, such as medications, doctor’s fee and others, causing a widespread “sandwich generation” in our society and forcing older folks to look for jobs beyond their retirement ages.
Inflation as an Ally
In simplified economics, inflation in the Philippines averages from 2 percent to 4 percent, which is moderate according to most economists. Moderate inflation is a sign our country’s economy is healthy as it also reduces the value of debt, with prices of goods and commodities adjusted and, at the same time, spurring economic growth. Low inflation or deflation, on the other hand, can be very damaging to the economy as it can cause low consumer spending, meaning delayed purchase of consumers.
My Conclusion
I believe that “if wages increased along with inflation” then it would be no problem at all for us living in the Philippines. But it has a downside, as well, with the increase in people’s wages. Investing in growth assets such as real estate and stockshares, which tend to keep at pace with inflation over time, is very ideal for investors in the medium to long term. For a long-term investor, a possible assumption in the increase of inflation over time should be considered and looked over in the design of your investment portfolio if one believes there is possible rise of standard of living and lifestyle in the near future.
Benedict Baluyot is a Registered Financial Planner of RFP Philippines. He is professional real estate broker with specialization in project selling and general brokerage of different estate properties from different local and national developers in Pamapanga and Metro Manila residential and condominium projects.
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