Did anyone else notice something?
Prices have been going up.
There are fewer promotions going on.
Ordering takeaway meals at restaurants is the same price as eating there. This is despite their operating costs being drastically lower with rental rebates and having their employees’ salaries subsidised up to 75%.
Classic economic theory suggests that restaurants can reduce their prices to attract more customers. But most restaurants are choosing not to discount, and are probably hoping to preserve their pricing power. Some of us are also using home deliveries, which increases costs as we have to pay new parties, the delivery driver and the delivery company.
Higher prices now is probably just the start, and it goes to the root of the supply chain. Rice has reached a 7 year high in prices. A meat processing plant closed, and warned of a meat shortage. As Indonesia and India go through their own COVID-19 waves, its possible to see more spikes and shortages of goods that they produce.
Most goods are made in China, “the World’s Factory”. But companies are moving their manufacturing away or reducing their reliance on China. This will probably result in higher prices in the short-term at least, as most other countries can’t compete with China at the same prices and quality.
The currency in our wallets is affected too. During recessions, MAS typically eases the exchange rate of the Singapore dollar, meaning it becomes cheaper relative to other currencies. This helps us to export more competitively, but it reduces our spending power as we import many goods from overseas. Again, this can lead to inflation.
Car prices haven’t budged either. COE prices plunged to as low as $1,000 in the last financial crisis in 2008- 2009. But curiously, COE prices now ($31,000) are still higher than it was at the same period last year ($26,000). Maybe more time is needed for prices to adjust.
Finally, all this temperature screening and enforcement takes money too. You have to pay the officers’ salaries, their equipment, and keep all the records. This is going to be repeated in every corner of the world for the foreseeable future. We don’t feel the cost of that for now, but it will be passed to the consumer eventually.
I think all these factors point to having higher than usual inflation in the coming years. We would have to pay more for security and health.
There is the counter- argument that there are deflationary pressures too. Consumers are spending less, and people are losing their jobs. This leads to a decrease in demand, which in theory, should bring down prices. Interest rates are going down, which should reduce home mortgage costs and encourage new property purchases.
But the inflationary pressures seem greater than the deflationary pressures. I would bet that prices increase rather than decrease over the next few years.
What should we do in a high inflation environment?
While many people are hoarding cash now, cash has the most to lose in an inflationary environment. It always loses its value over time, and that’s accelerated in a high inflation environment. All the 3 major banks have cut back interest on their high-yield bank accounts.
Fixed income investments like bonds and insurance are not likely to do well either. Low interest rates reduce their returns, and I can see expected returns on insurance and endowments being adjusted.
So most investors will be pushed towards riskier assets like stocks, which traditionally outpaces inflation. Property also does decently. Gold is another supposed safe haven as well.
It looks like we all have to take more risk to beat inflation. There is no other choice in terms of preserving the value of your money.