Wolf Money(The Chronicles of Inflation)
Inflation or disinflation are commonly used words in economic narratives to describe price expectations of an increase or decrease in goods and services . If there is a number to work with, The US Fed and Japanese central bank conventional wisdom put it at 2% as the golden number, not too hot or not so cold. Central banks around the world had a love hate relationship with inflation. Too hot, it create bubble in the financial market and cause social unrest, too low it may cause deflation which can result in falling asset prices. Japan went through many decades of deflation in its economy cause by bad loans weighting on banking sector profit and their ability to lend. Many businesses had to defer capital spending due to lack of pricing power. A generation of penny pinching consumers were born which restrict the ability of Japan businesses to raise price. The ¥100 shop boom are the indirect result of deflation as consumers went for cheap and value for money products. Worldwide inflation had surge to decade high due to material, manpower and logistical constraints created by covid 19. Shipping rates hits decade highs recently. As shipping rate is one of the main component of cost of goods sold, a substantial spike will impact everyday goods used by consumers. Some shipping rates are higher than the cargo they carried.
The surge in wage inflation in US due to lack of workers is a clear and present danger to Federal Reserve dovish policy. There are talks in the market about a jam break on the accommodative policy. If the Fed need to crawl back the cheap money by hiking interest rate faster than market expectation to combat excessive inflation, financial market will suffer a sharp correction. The recent surge in covid case in US and Europe were pull factors against such move. The shipping rate are also moderating. The market will have a clearer picture on the inflation front towards the start of next year. The expectations of a rate hike had moved forward from 2023 to 2022. The market is calling bluff on Fed Reserve transitory inflation outlook.
(The usual size 355ml can of coke before the movie “honey I shrink the kid(coke)”
In Singapore, October inflation hit a high of 3.2 percent at 8 years high which mean prices of essential items are on the rise. Electricity tariff, groceries and even cuppa at my favourite coffee joint hiked price recently. Milk powder from New Zealand just a year ago cost $6.95 and now $9.50 per pack. Some price hike are more direct, some are more subtle by the way of reduce content. Take for e.g, a can of coke used to have 355ml and now a can contained 320ml, a reduction close to 10 percent over the years even if price remain the same. I hope my favourite sport shoes brand wouldn’t increase price indirectly by selling one shoe instead of a pair. The implication of high inflation act as a form of taxation to consumers and businesses which reduces spending power and profit. The mother of all commodity that contribute to inflation is the increase in oil price. The 50 percent spike in oil since last year is a big enough concern for US President Joe Biden to step in with the release of Oil from SPR in concert with other countries to try to tame the gain in Oil price.
Central banks are walking on tight rope. Any substantial tightening of monetary condition can cause a big drop in asset prices which can bring out the deflation bogeyman which most central bankers are most fearful off. The long term trend of disinflation remain unchanged due to advancement in technology. AI, Online service, EV, automation, robotic are making things and services cheaper. For e.g the inclusion of digital IC in SingPass app can potentially save the government and citizens millions of dollars in processing fees and fines. The promotion of digital transaction save banks millions of dollars in manpower and rental cost due to the elimination for the need to have physical banking outlet. The Central banks ambivalent relationship with inflation continue to play out like cartoon characters of Tom and Jerry.
Food Inflation, in my opinion is probably one of the most problematic area of all inflation. One can live without that luxury overseas holiday but can one live without food ? Just look at the price of your favourite fishball noodle. (You get broad picture of what is coming). As China become a middle class society in the next decade, millions of Chinese would like to have more and better food. China used to be exporter of deflation with it cheap manufacturing of everyday goods and food, the tide had changed as Chinese become the consumers of the world, exporting deflation will likely be a thing of a past. Just like durian, price rocketed when the delicacy catch on in China. People in Singapore had to pay more for their mao shan wang. Wage in China had jumped, some foreign manufacturers find China manufacturing cost high had since look outside of China for cheaper labour. As a generation of factory workers and farmers retired in China, the younger and more educated generation of Chinese have more aspirations than engaging in low pay manufacturing and farming. Shortage of workers, higher cost. The situation surround food inflation and security will be the main agenda of most government.
On a personal level to combat inflation, I buy things forward that I use on a regular basis. Covid 19 changes how me and my wife consume our coffee due to social distancing rule. I acquired the art of making my own coffee. I used to drink at least 2 cup of coffees at my neighbourhood coffeeshop. Now I barely does. The math and the taste side of things do make sense. I save close to $120 with a bag of 500g coffee powder costing $9 lasting a month. Cost on electricity and water were barely visible. I could now make my ideal coffee with the right sweetness every time. That is close to 1k saving on coffee alone over a year. Of course to out run inflation the best way is to ask for a salary increase or invest your money well. The later might be an easier option. Property and stocks provide natural hedge against inflation. Some of my watch collecting friends deem Rolexes and Pateks as good hedge. For people taking public transport, an adult transitlink pass costing $128 a month can be an option if one is paying more than $4 a day for their public transportation. A friend of mine mentioning spending close to $1k on Grab per month which she had problem keeping up. There are plenty of ways to stretch that dollar without compromising one lifestyle. Do let me know if you have any good idea to stretch your dollar. Have a great weekend ahead.
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All investments is highly speculative in nature and involves substantial risk of loss. We encourage our reader to invest very carefully. We also encourage reader to get personal advice from your professional investment advisor and to make independent investigations before acting on information that we publish. Much of our information is derived directly from information published by companies or submitted to governmental agencies on which we believe are reliable but are without our independent verification. Therefore, we cannot assure you that the information is accurate or complete. We do not in any way whatsoever warrant or guarantee the success of any action you take in reliance on our statements. All information provided are for information only. Buyer beware,do you own due diligence.
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