Inflation proof!

Data out of the US indicates that the rate of inflation for May 2022 was 8.3%. In the EU and UK, it was 8.8% and 9.1% respectively. Here in Singapore, headline inflation was 5.6% (less accommodation and private transport, core inflation was a more modest but still significant 3.6%).

In an inflationary environment, our savings and earnings gradually become worth less. This is not necessarily a bad thing - current conventional wisdom suggests that about 2% inflation is a sweet spot where people know that it makes sense to spend money now, instead of letting its value erode. This spending keeps vendors, companies and the economy growing.

But to get a sense of how significant heightened inflation can be - a salary of $2000 in the US last year is now only worth $1834. If this keeps up for just one more year, it'll be worth $1682. In five years, $2000 shrinks to $1297 worth of value. Put another way, a $5 plate of chips will cost $5.4 in 1 year, and balloons to $7.3 in 5 years. That doesn't sound good.

The spike in Singapore's inflation rate so far seems comparatively less dramatic. Thankfully so, because inflation has a disproportionate impact on people with lower income. A greater proportion of their income is spent on necessities like food, shelter and utilities. 

In contrast, for the wealthy, a larger proportion of their income is spent on discretionary items like holidays, fine dining and fun shopping. When inflation hits, and their money can't buy as much as it used to, they can just cut back on discretionary spend. The poor can't. And there are many, many times more poor people in the world than rich people.

So yeah, this is a serious issue, which is why central banks all over the world are raising interest rates to curb borrowing and try to cool off inflation. The problem is that raising interest rates tends to address the demand side of the issue by making it more expensive to borrow and spend. But current inflation seems to be driven by disruption to supply, not least because of the Russian invasion of Ukraine, and the consequential impact on oil and gas supplies out of Russia (a critical source of fossil fuels for Europe) and food supplies out of Ukraine (one of the world's largest producers of corn and wheat). Everyone needs oil and gas because everyone needs energy for our homes, factories and utilities. Everyone needs corn and wheat, because it's what we, and the animals we rear for meat, eat.

Rising interest rates also tend to have the consequence of cooling the economy, which raises the spectre of stagflation - prices rising even while growth stalls. High inflation is less impactful if earnings are also rising. High inflation while earnings stall or even dip is doubly problematic i.e. not only are your dollars worth less in comparative terms, you're also getting less dollars in absolute terms!

People much smarter than me (hopefully) are trying to resolve this tricky problem. But what can we do?

Funnily enough, my family has learned some tips from my children in recent weeks. I call them kids, but they're really young adults by now! So here are two stories.

Inflation Proof - Story 1: for quite a while now, my daughter has bought much of her clothes and footwear second-hand. I don't know how much of this was driven by a project she once did back in school, which was on the impact of fast fashion on the environment, I guess some? 

But an important part of it is really just cost-sensibility. She tells me that going second-hand gets her something like 50% off the rack rate. Even better, whenever she wants to switch up her wardrobe, she can usually sell off her stuff, at say another 10-20% off. So she gets back most of what she paid in the first place. And, she gets to stretch her wallet, keep her look fresh, and her room clutter-free of old no-longer-worn stuff. Pretty wow.

So now we're all slowly getting into what people call the circular economy. I bought myself a second-hand bone-conducting headphone for running, at about a third of the rack rate. It was great, but after a couple of months, I realised that with my big ears that stick out, they tended to hurt after a long run. So now it's back up for sale to the next environment and cost-conscious runner, hopefully with smaller ears :)

Inflation Proof - Story 2: my son recently went out with his friends. I thought he forgot to bring his wallet, so I asked him about it when he got home. He said, oh don't worry Daddy, I remembered to bring my wallet, but I didn't need it much anyway. I said, huh? Weren't you out in Orchard Road? 

He said, yeah, we went to this Japanese place to meet our juniors to handover our CCA duties - I saw that the set was like $12.90, and I didn't like any of the options, anyway, so I was like, nah. I went to Macs and bought two $2 McChickens. Did you know they leave that option off the menu? But if you ask them, a McChicken is the cheapest thing there, just $2.

I didn't know that. But that's not the end - he wasn't done with his savings. Cos I then asked him, didn't you still have to order something back at the restaurant with your friends? He said, yah. But every drink was like $5, so I just paid $0.50 for tap water (!)

Some might read this and think, wow what a skinflint. As a Dad, my instinct was not far off - I told my son, uh, you know $12.90 in Orchard Road is not THAT bad, and if it's just once in a while, you can go ahead, otherwise your friends might think you're weird. And my son looked at me funny and said, Daddy, why would I need or want to impress these people with my drink? I don't need to impress my friends!

This is the sort of thing that really makes me proud of him. When he's figured out what's the right thing to do, he really doesn't allow his pride to stop him from doing it.

Maybe you have other interesting ways to deal with inflation. I realise that my stories of reducing consumption is the sort of behaviour that probably adds to the risk of recession. But you know, we can all only do what we can :D 

It's not just about saving of course. Otherwise it's just hoarding. Saving has to have a purpose. So what is the "so what" of saving? 

It's hard. But the purpose of watching our spending has to be *so that* we reduce our self-centredness and self-indulgence, and *so that* we have the *freedom* to *give away*. 

May the God of love teach us that whatever we save, is not merely to be hoarded up, but shared generously with those around us, especially in difficult times. 

Have a joyful, generous, purposeful weekend!

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Your adornment must not be merely external - braiding the hair, and wearing gold jewelry, or putting on dresses; but let it be the hidden person of the heart, with the imperishable quality of a gentle and quiet spirit, which is precious in the sight of God. 

1 Peter 3:3-4

The ground of a certain rich man yielded an abundant harvest. He thought to himself, 'What shall I do? I have no place to store my crops.' Then he said, 'This is what I'll do. I will tear down my barns and build bigger ones, and there I will store my surplus grain. And I'll say to myself, "You have plenty of grain laid up for many years. Take life easy; eat, drink and be merry."' But God said to him, 'You fool! This very night your life will be demanded from you. Then who will get what you have prepared for yourself?' This is how it will be with whoever stores up things for themselves but is not rich toward God. 

Luke 12:16-21