Inflation happens whether you like it or not
"Prices are going up hence we need more money to live!"
As a working adult in Singapore, I always wondered about the impacts of inflation and its purpose in the economy. In this post, we will explore why inflation happens and how does it benefits or hurts peoples’ finances.
1. Inflation redistributes to the less wealthy (Good)
Wages typically increase annually, hence, inflation is necessary because annual growth in GDP might not be sufficient to fund such requirements. Additionally, capital raised can also be used as research funding or for the expansion of organisations to create more jobs.
In a way, inflation redistribute wealth from the rich to the poor. This is because the rich will generally have a greater likelihood to have more cash. That said, it is common for wealthy individuals to invest their cash into assets to reduce the impact of currency inflation.
2. Inflation manages export prices (Good)
Currency affects imports and exports as it affects the price of traded goods between countries. This calls for nations to be sensitive towards trading partners to ensure that their goods for export remain price competitive in the market. Without currency supervision, countries will potentially face a decrease in trade volume and trade income.
From the above examples, we realise the importance of staying relevant through the management of inflation. Having said that, too much of anything is never good.
3. Inflation widens the wealth gap in the country (Bad)
Inflation promotes growth and trade for a country to earn more income for expansion. That said, it is evident that many countries faces issues with inequality. This is because wealth is distributed based on existing non-cash assets. Therefore, the rich will always benefit more from inflation more, leading to greater inequality between the rich and poor.
4. Inflation increases cost of living in the country (Bad)
As the value of currency depreciate, the cost of production, rent and services will all increase as well to keep up with inflation. This cost is bore by consumers and affects the majority of the population that does not benefit as much from inflation. To make things worse, some of the services might even include cost of education, healthcare and public transport. As such, governments have to take up additional debt to fund subsidies for those who cannot afford public goods.
Suggestions to counter inflation
- Learn how to invest cash to convert into assets for capital growth
- Get insured for essential services such as healthcare
- Avoid excessive debt especially for items which depreciate in value over time
Closing Thoughts
While there are other views on inflation going out of control and leading to currency crisis, my focus in this post is to emphasise how inflation impacts us. In essence, inflation is a double edge sword and it must be managed well to ensure stability in the cost of living and growth in the economy. I sincerely hope that Singapore will not reach a point when inflation can no longer reach the middle class and below.
