Keeping Up With Inflation

In the previous post, I described how increasing inflation actually impacts our personal lives. Given that the inflation numbers are expected to persist in the near future, and with that, diminishing the value of every dollar I have, I began to feel very worried and anxious. I decided to probe further with one important question in mind: how do I keep up with rising inflation?

With high inflation dominating news headlines throughout the year, there was no shortage of advice from experts on how to be more prudent in your spending and manage your finances better. While this is good advice, it is beginning to sound rather generic and hollow.

Source: Giphy / Pudgy Penguins

Are we to keep adjusting our spending while inflation continues to climb higher? If all we can do is to be frugal with our expenditures, purchasing power will continue to diminish over the years until there really isn’t anything left to afford if no other course of action is taken. If I sound irrational and paranoid, well, that’s because I am given the state of the global economy today.

And so, I assessed my current situation and used it as a starting point of investigation to find out what I could actually do to improve my situation rather than leaving it all up to fate and being frugal. Here are some steps that can be viewed as good corrective measures or useful information.

Lagging behind

Salary and wages reduction
Source: Envato Elements / iLixe48

It doesn’t take a genius to figure out that in order to keep up with the rising cost of goods and services, our income should also be growing proportionately. The problem is that employers will rarely if ever, pay salary or wage increments that match up with inflation rates. Especially so in these high inflation times. 

Why? Not to tar all companies with the same brush, but most companies are profit-oriented and are always seeking ways to reduce their operating costs. Besides, it can be quite difficult for employers to reduce any inflation-adjusted increments if or when inflation levels do come down.

In this current situation, however, suffice to say that the standard 3 per cent annual increment that many multinational corporations pay to their employees is very much below current inflation levels. Therefore, I am of the opinion that employers should take inflation rates into account when deciding on what is fair compensation for workers. 

This isn’t news to most people, but I am no policymaker, nor am I influential enough to affect such a systemic change in the job market. So, what can a regular salaryman like myself do? Aside from bringing the topic up during pay negotiations with employers, I discovered an important metric that I think all wage and salary earners like myself should know about. It’s called real wage.

Counting salary / wages
Source: Giphy

In a job application process, you typically negotiate your pay with your prospective employers before accepting a job offer. The final outcome is known as your nominal wage, which is defined as the amount of money you get paid by salary or per hour. In contrast, real wage is how much you actually make after adjusting for inflation. 

Calculating your real wage will enable you, as an employee, to know what you should be demanding when it comes to negotiating pay. Having this piece of information will help determine what is fair value in terms of pay. Under current circumstances, it would be advantageous at the negotiating table to know what you should be asking for, regardless of whether you are currently employed or looking for a job. It’s good to be informed.

Coming for your nest egg

Elderly retired woman and her savings in a jar
Source: Envato Elements / tommyandone

Another concern arising from persistently high inflation is what your money will be worth in the future if inflation keeps rising. I’m talking about your retirement funds and its value when you reach your golden years. If inflation is currently eroding your dollar at the rate that it is today, imagine the damage to your retirement funds by the time you reach retirement age if the inflation rate continues to climb or even stay at its current rate. Would it be enough for you to retire comfortably?

I, for one, am not willing to sit around and hope for inflation to go back to pre-pandemic levels and remain low. When inflation rates were peaking in Singapore sometime in the middle of 2022, there were calls by many quarters for the government to review the floor interest rates that CPF pays out to members. The current rates are 2.5 per cent for the Ordinary Account (OA) and 4 per cent for the Special Account (SA), MediSave Account (MA) and Retirement Account (RA).

The government has since said that it will not be revising the CPF floor rates despite the current situation. However, I have since learned that there are ways to optimise your CPF accounts that could help to cushion against current and future inflation rates. 

For example, did you know that CPF pays an extra 1 per cent interest on the first $60,000 of your combined OA and SA balances? However, there is one catch. There is a $20,000 cap for the OA, which means that any amount exceeding that cap will not be entitled to that extra 1 per cent interest payout. Assuming that you, dear reader, are a young millennial CPF member just like me with a low SA balance, an easy way around this is to transfer some savings from your OA to your SA. That way, you maximise the CPF payouts and receive a total of 5 per cent per annum on your SA. 

There is also the option to make cash top-ups to your CPF accounts, meaning that you voluntarily contribute to your retirement accounts in addition to the 20 per cent mandatory contribution all Singaporeans are subjected to. This can be beneficial in several ways. Not only do you get a tax relief of up to $8,000 per year, but you will also make use of compounding interest, especially if you started early. Do note, however, that CPF top-ups are irreversible, so plan wisely and ensure that you won’t be needing the cash anytime soon.

One last mechanism that CPF has to offer that could help protect your retirement savings from inflation is the CPF LIFE Plan. CPF LIFE is an insurance scheme that provides you with monthly payouts no matter how long you live, starting at the age of 65. There are 3 plans to choose from, namely the Standard, Basic and Escalating Plans. As the name implies, the Escalating Plan has a payout plan that increases by 2% annually. 

Source: Singapore Central Provident Fund Board

The incremental annual payout will be useful in keeping up with any rise in the cost of goods and services. Though the incremental rate is nowhere near as high as current inflation levels, it does appear to be a wiser plan than opting for a Standard Plan that only gives you a flat payout every month for the rest of your life.

The good news is that you don’t actually have to start CPF LIFE payouts at 65. You can choose when to receive the payout between the ages of 65 to 70, after which a Standard Plan will be automatically opted in for you if you have yet to choose a plan. There is good reason to delay the payout if you can afford to because for every year that you delay, CPF will increase the payout by up to 7 per cent.

Inflation hedges

Gold bars isolated on white background
Source: Envato Elements / ayman-zaid

Finally, we have come to the section where we talk about investments. For the longest time, investors have been trying to figure out which asset class is the best inflation hedge. It is a subject of intense debate, and investors tend to get jittery whenever high inflation rears its ugly head. 

Most experts claim that certain types of stocks can outperform inflation rates. But alternative investments such as real estate, gold, wine, art and even cryptocurrency have been considered as likely contenders to beat inflation. Regardless, I think it is always safer to opt for MAS-approved or registered investment products, so make sure to do your research before venturing into any alternative investments. 

Aside from giving me a headache, digging deeper to ascertain the truth into these claims gave rise to the burning question of what can I invest in that could keep up with, or better yet, beat inflation? And without risking too much of my already shrinking dollar too!

Given that all investments carry risks, the simple answer is that there is no guarantee that any particular type of investment can be used as a good hedge against inflation. As I am also no expert, I would not want any of my own findings to be misconstrued as financial advice or investment recommendations, as that would be wrong and unethical. 

Final thoughts

Notice how we are going down a rabbit hole here? If you came here looking for answers on what exactly to invest in, I am afraid you will be disappointed for now. That being said, it may be high time that I talk to a financial adviser about investments that are best suited for hedging inflation and present my findings to you here. 

So, stay tuned and keep watching this space!


CNBC, CPF (1)(2), Endowus, Straits Times, CNA, Today, The Motley Fool

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