Market Insight Weekly Update: Four In A Row

Inflation has been the highest in Singapore in almost 14 years! Fighting inflation may seem like a futile endeavour. However, we are not entirely helpless. Our investment team shares how you can combat inflation in 2 simple ways.

17 August 2022

Investments, Insights

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Singapore’s inflation rate has increased to the highest in 14 years. Fighting Inflation may seem like a futile endeavour. However, our investment team shares how you can combat inflation in 2 simple ways.

(8 August 2022 – 12 August 2022)

The major stock indexes each posted returns exceeding 3% as investors welcomed indications of a modest easing in inflation. For the S&P 500 and MSCI World Index, which were up 3.29% and 3.00%, respectively, it was the fourth positive result in a row. This is the longest string of weekly gains since November 2021. In Fixed Income, the US 10-year treasury yield rose 1 bps to 2.84% and the Bloomberg Barclays Global Aggregate Index fell 0.12%.

Last week, Singapore’s Prime Minister Lee Hsien Loong gave a speech on the eve of our 57th National Day stating, “The world is not likely to return anytime soon to the low inflation levels and interest rates that we have enjoyed in recent decades.”

Rising living costs have always been a hot-button issue for Singapore, and households are now feeling the pinch of rising costs primarily driven by the war in Ukraine. Despite inflation in Singapore being low relative to many advanced economies at 4.4%, excluding private transport and accommodation, it’s nevertheless accelerating. June’s reading was the highest in almost fourteen years.

While there is nothing we can do to stop the war from happening, we are not entirely helpless when it comes to what we can do to ease the impact of inflation on our wallets during these volatile times. For personal finance, we can typically look at it from 2 lenses, short-term financial planning and long-term financial planning.

Under short-term financial planning, the focus is on managing our cash flow in the immediate future to ensure that we continue to spend within our means, with some savings for our future. We can review our budget and spot areas where we can cut down on expenses. For the long term, the focus switches to how you can make your savings grow so that its value does not get eroded by inflation. This is important because, at the very least, you will want your money to be worth at least the same amount in 20 years as it is today.

Reviewing Your Budget

The first thing you can do today is to review your budget if you have one or start a budget if you have never had one. Budgeting is a tool that helps you to track your monthly or annual expenditure to keep it within your monthly income so that you do not end up overspending. Your expenditure can be split into fixed expenses and variable expenses. Fixed expenses refer to monthly bills and loan repayments you must pay to keep the lights on and ensure you have a home to return to. Variable expenses are expenses you can choose to spend depending on your lifestyle. An example would be your daily meals, i.e. you can choose to spend $5 for a meal at the food court or $20 for a meal at a restaurant.

Most people tend to spend on what they need and want first before putting aside any balances at the end of the month. However, this may lead to a situation where there is nothing left for savings at the end of the day. A more prudent way to approach budgeting is to determine in advance how much you would need to set aside monthly for your fixed expenses ( including the fixed expenses you pay on an annual basis like insurance premiums, taxes etc.), the portion you would like to set aside for savings, and then spend the rest on lifestyle expenses. This way, you won’t find yourself caught in a situation where you overspend and have nothing left to save, or worse, having to borrow money.

Making Your Money Work Harder for You

Assuming you save $1,000 every month and put it under your pillow, how much will you get after 20 years?

Simple maths would put you at $240,000. After factoring in inflation of 2.5% p.a., this sum of money would only be worth $145,000 in 20 years! Where did the $95,000 go to? While you were busy working to increase your income, so did the rest of the world, resulting in the increase in prices of goods and services together with the introduction of new technologies. Inadvertently, the same dollar today will not be able to buy you the same things in the future. This is the real effect of inflation that you need to protect yourself against.

To beat inflation in the long run, you can either save at least 50% more to put you in the same position or do the wiser thing of investing your savings to earn at least 2.5% per annum so that your monies will always keep pace with inflation and not lose its value. It is not difficult to get a return of 2.5% per annum though you have to do better than leaving your money in bank fixed deposits. If you prefer not to take any market risks and don’t mind losing liquidity on your savings, you can top up your CPF savings or start an endowment/savings plan with an insurer.

If you can stomach some investment volatility, you can invest in a globally diversified investment portfolio that best suits your risk appetite. The long-term returns range from 3% to 7% per annum, depending on the portfolio composition of stocks and bonds. Historical evidence shows these financial assets will be able to deliver positive returns net of inflation, allowing you to not just beat inflation but also achieve your goals with less effort.

In conclusion, inflation is part and parcel of life. Rather than lament about it, the wiser thing to do is to take charge of the situation through proper budgeting and long-term savings and investing. To find out more about actions you can take, speak to an accredited financial adviser, or reach out to us at MoneyOwl, an NTUC social enterprise with the mission of helping people in Singapore make wise financial decisions in a comprehensive, competent, and conflict-free manner.

Inflation Moderation

Although US inflation remains near its highest level since the early 1980s, the latest monthly Consumer Price Index report brought some relief, which triggered a stock market rally on Wednesday. Inflation rose at an annual 8.5% rate in July, marking a slowdown from the previous month’s 9.1% figure. Falling gasoline prices were largely responsible for the decline.

Improving Sentiment

A monthly gauge of US consumer sentiment rose, marking the second monthly gain since it fell in June to the lowest level in records dating to 1952. Friday’s preliminary report from the University of Michigan’s consumer sentiment index also indicated that consumers’ future inflation expectations improved but remained elevated.

Energy Crisis

The energy crisis that’s crippled Europe for months could get worse with just about two months to go before the winter heating period officially begins. The region is still heavily dependent on Russian gas to get through the colder months, and any further disruptions to supply could heighten the risk of blackouts and rationing. In addition, the Rhine – north-west Europe’s most important river for the transport of industrial goods, including energy products such as diesel and coal — is set to become virtually impassable at a key waypoint in Germany on Friday due to low water amid a scorching heat wave. The impact could linger for months, potentially driving up gas demand as a replacement.

Soaring Rents

Rental costs in the US are soaring faster in more than three decades, surpassing a median of $2,000 a month for the first time ever and pushing rents above pre-pandemic levels in most major cities. Increases are particularly steep in metropolitan areas that saw large influxes of new residents during the pandemic, but the rental market is sparing almost nowhere and no one. Demand for rentals has soared after many would-be homebuyers backed out of the market after mortgage rates jumped.

Drills Over

China’s military said exercises held around Taiwan in response to US House Speaker Nancy Pelosi’s visit had ended while pledging to continue regular patrols near the island. The People’s Liberation Army “successfully completed all tasks,” a military spokesman said. The declaration came as Beijing’s Taiwan Affairs Office published a white paper blaming Taiwan’s leaders for increasing the risk of war by refusing to accept that both sides belong to one China.