What you need to know to fight Singapore inflation

“Inflation is when you pay $15 for the $10 haircut you used to get for $5 when you had hair”

 - Sam Ewing

Inflation in Singapore has seen rates of 4.8 – 5.2% consistently which has caused concern and unease amongst savers with funds held in a bank account earning 0.25% interest. The real rate of return is well into the negative territory.

Real Rate of Return = Nominal Rate (0.25%) – Inflation Rate (5.0%)

In the case above, this is equivalent to losing approximately 4.75% of your savings each year.

To put another way, the buying power of your $100 today, assuming the same rate of inflation continues, will have the buying power of just $95.25 in a year’s time.

What’s causing inflation in Singapore?

There are many contributing factors in Singapore including property price increases, COE premium rises, property and rental prices increasing. Of course, if you have found some way of avoiding all of these costs, then the ‘core inflation’ measure sits at approximately just 3.0% which is much closer to being a comforting figure. However, this would be unlikely for most reading this.

This is particularly alarming for those in or close to retirement looking to generate a steady, low-risk income that at the very least matches inflation.

So, with inflation so high and savings rates so low, what can investors do?

1)     Inflation-Indexed Bonds

There are funds and investment opportunities that primarily invest in inflation-indexed Government and Corporate bonds that provide protection against inflation.

2)     High-Yield Corporate Bonds

Corporations, both in the APAC region and abroad are regularly issuing new high-yield bonds that provide regular coupon payments that exceed inflation. Of course, with any bond investments, you must also factor in future interest rate movements which can impact on the price of the underlying bonds themselves.

3)     Equity Portfolios

Equities tend to outperform inflation over the long-run however it is important to note that this is largely in terms of capital appreciation rather than dividend payments. By investing in a portfolio of strong performing equities, you can also out-perform the effects of inflation.

There is of course always the theory that gold is an excellent hedge against inflation however given the precious metal’s recent fluctuations, I am not highlighting it as one of the options in this article as protection against inflation.

It is difficult to see any reason for inflation in Singapore to drop in the short to medium term, particularly given the movement of wealth to this financial hub. It is therefore important for you, as investors and savers to ensure that your own investment plans protect you from inflation.

PLEASE NOTE: IPP Financial Advisers Pte Ltd is a licensed Financial Adviser and neither the company, nor its representatives are tax advisers. Any reference to tax, in any jurisdiction, is sourced from third party sources, which are deemed to be reliable and accurate at time of print, and professional tax advice should always be sought independently.

The information presented in this article is for general information purposes only and should not be considered as investment advice. Please consult a Financial Adviser before making any decision/s and consider the right strategy for your own circumstances.

Any reference to any investment, fund or product should be read in conjunction with the prospectus/brochure/factsheet. Investments can rise and fall and past performance is not an indication of future performance.