Let’s ask…What is Inflation?

We have all heard the tales of inflation, here are a few:

– Once upon a time, noodles cost only 5 cents
– Your parents bought a 4-Room HDB flat at only $50,000 (I’m guessing here)
– Your mom’s salary used to be only $500 a month
– It’s getting more expensive to live in Singapore

These, and many others are some of the ways a lot of people talk about “Inflation”.

Put simply, Inflation means:

  1. A rise in general prices of goods and services over a period of time
  2. Your money buys less things than they used to

Is this a bad thing? Should Governments eradicate inflation? Why does inflation happen?

Let’s explore…

Inflation is natural, healthy and a phenomenon that happens to any economy interested in growing.

Here are some reasons why it happens:

a.) There is scarcity in a product or service

For example, fish is low in supply due to a monsoon season. Less fishermen go out to work, thus there is less fish for all. Because of this, people need to pay more.

b.) There is too much money in the market

To control this, a Monetary Authority (or Central Bank in other countries) control the supply of money in the market by increasing or lowering the interest rates imposed on borrowing from them. Governments use this policy to regulate the amount of money there is in the market.

How can there be too much money in the market?

When a country experiences low unemployment rate and everyone is making money – people will want to spend this money. When there is a lot of buying activity, products and services will run low. Imagine this on a nationwide level, with billions of dollars exchanging hands everyday. Day in, day out… the result is: Inflation. Prices go up.

If my money buys less and less over time, how can Inflation be a good thing?

Yes, inflation is bad because your dollar is less powerful over time. And hyper inflation makes certain life necessities like food, medicine and shelter more expensive. High inflation can even lead to people hoarding goods over time, but…

Inflation is also good. It increases the value of goods and services throughout the market. Moreover, it also:

a.) Encourages investments in non-money products: Thus making more people richer, faster.

b.) Because of the above, non-money products increase in value.

b.) Inflation also reduce the severity of recessions

As Inflation reverses (Deflation), the prices of your goods and services gets thrown in reverse also: value goes down. When this happens, a chain reaction happens and ultimately, businesses will find that it is no longer profitable to stay in business, so they shut – creating unemployment.

The moral of the story? Inflation is good and healthy and must be allowed and controlled.

(This is also why you should not hold your money in cash, but convert them into products that appreciate in value faster than inflation does)

What then, is a healthy rate of inflation? Well, that depends on the size of the economy, their history and economic activity…but most countries agree that between 2% – 5% is a good rate for growth. Inflation is measured with a tool called the Consumer Price Index (or CPI for short). It takes the cost of a basket of goods (property, fuel, food etc) and measures it’s rate of increase over time.

Let’s take a look Singapore’s rate of inflation for the past 10 years (Source: www.singstat.gov.sg):

2000: 1.3%
2001: 1%
2002: -0.4%
2003: 0.5%
2004: 1.7%
2005: 0.5%
2006: 1%
2007: 2.1 %
2008: 6.6%
2009: 0.6%

To interpret this information is a tremendous task and I will not attempt to do so here. You can make your own deductions, but as you can observe, our growth is relatively stable and contained over the years (apart from regional/global economic crises).

2008 saw a remarkable increase in prices. The largest contributor goes to Housing. The HDB has recently introduced policies to cool down an overheated public housing market. Some critics say this has come too late and blame the government for underestimating population needs. However, before we shove blame to any one entity, let us understand some reasons for the prices in this segment to go up:

a.) Singapore is very land scarce. And time is needed for property projects to be realized. Balancing supply with demand is tricky and especially so for us.

b.) By international standards, our property is still relatively cheap. Thus attracting the investing community (not necessarily foreigners) to make purchases on our property. To control this is not as easy as regulating them out of the way as there will be economical consequences to pay.

c.) Due to the vision of our founding members of modern Singapore, it is now the ideal of both the Government and the people to have homes for (almost) all. This results in a very high rate of property ownership in this country.

d.) Demand for housing is “inelastic” (another economic term). Put simply, this means that, no matter how high the price of housing, there will always be strong demand. It is difficult to keep such products affordable in a natural manner, yet regulations have to be used carefully in order not to trigger a series of negative effects.

Implementation of policy needs to be deliberated carefully, long term consequences thought of and much research carried out before execution. I am upset when certain groups of people, feeding on public frenzy, want the government to take economically unsound decisions for short-term relief. Remember the points noted above: If property developers find it unprofitable to build houses, they will stop doing so… resulting in less property and ultimately even more expensive houses. It is also unrealistic and economically unnatural (not to mention unaesthetic) to rely solely on the HDB to supply for 100% of the country’s housing needs – once again, if Governments need to spend, they will have to increase taxes for it.

Yes, Inflation is a headache… but getting a Panadol effect is not realistically possible.

 

 

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About the author

Tay Leong Tan

Tay Leong Tan is a collective of 3 writers. Tay, Leong and Tan. (Who were you expecting?!) We are enthusiastic about labour issues, economics and current affairs in particular.

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