Inflation and you

Inflation. The topic that has everyone talking recently. People are getting more concerned about the value of their money, their assets, their pay and the list goes on. Thursday, the STI closed in a black candle. I have not much to comment on that given that I have no change in my outlook for now. I shall use this entry to discuss a topic which I promised to discuss.

I guess everyone knows what is inflation. Basically, the prices of things go up. Consequently, the money we possess buys us less things.

Inflation is the reason I invest my money. One has to do something to my money in order to maintain its value. A savings account that gives me a 0.25% return annually means that my savings devalues at the rate of (Inflation rate - 0.25)%. This is not good because at a rate of 4%, it will half in 20 years and become a quarter of its current value if I retire 40 years later!

This covers the first 2 concerns listed above and now for the third...

Inflation causes people to panic about their pay. "My earning power is reduced if my pay does not increase more than the inflation rate!" people say. The cruel reality is, that if people maintain the same level of disposable income in a high inflationary environment, prices will continuously be driven upwards. Businesses will find it expensive to produce and supplies do not increase as drastically as demand. This leads us to another cruel reality when it comes to increments. If the proposition above holds true, businesses have no reason to give better increments for 2 reasons: 1) that the inflationary environment will continue and, as a result, drive up operating costs and reduce profits. 2) Profits will be further reduced if human capital costs increase due to increments. There will be no sense in giving staff more than the business can profit. For example, if my profits are 5% before budgeting for increments, there is no reason in giving my staff increments greater than 5% because my business has not been growing that rapidly.

The markets have been uncertain and crawling at a low. The outlook for the coming months is not very bright either. What will you do if you own a business?