Inflation can diminish purchasing power. Exploring investment opportunities in various asset classes such as equities and bonds, subject to our individual risk appetite and financial goals, can help manage the impact of inflation over the long run*.
The (not so) curious case of the S$3 chicken rice
That things have become more expensive can be an understatement.
In 2018, the average retail price of a plate of chicken rice was around S$3.40, according to data from the Department of Statistics Singapore1. Five years later, the average retail price of the same plate of chicken rice has risen over 23% to around S$4.20. Likewise, other hawker classics such as "mee rebus” and “economical rice” have also seen prices rising more than 17% and 16% respectively over the last five years1.
What has gone unnoticed is now unavoidable
Indeed, the general rise in prices – also known as inflation – has been more notable of late. Prior to 2022, inflation had stayed relatively muted for several years, as illustrated below. Headline consumer price inflation averaged around 1.8% annually over the last four decades between 1981 and 20212,3.
This changed in 2022, when consumer prices rose an average 6.1% from the previous year – the fastest rate of increase since 20082,3. And while headline inflation has eased to around 4.8% in 2023, it still remains elevated relative to history4.
Various factors such as COVID-19 disruptions, geopolitical tensions, supply chain snarls, worker shortages and pent-up demand, had contributed to the general rise in the prices of utilities, transport, food and other essentials3. Importantly, the recent episode of high inflation was not just confined to Singapore – it was a global phenomenon.
Why inflation matters
Inflation matters insofar as it affects the real value or purchasing power of money. Given that food, health care and transport prices have increased 67.2%, 57.5% and 78.1% respectively over last two decades between 2003 and 2023, one could scarcely afford the same basket of goods and services at today’s prices with the same amount of money it would have cost 20 years earlier5. Put simply, if a dollar affords you less at today’s prices than it does yesterday, then the real value of the dollar has diminished.
Over time, this could have a meaningful impact the real value of money. Consider the value of S$1,000 in 2003, invested in 1-Year SGS T-Bills that is rolled over annually. As illustrated below, while the monetary or nominal value of this initial investment grows over time, its real value declines when adjusted for inflation.
This highlights the importance of exploring investment opportunities in various asset classes such as equities and bonds that could potentially earn a reasonable rate of return subject to our individual risk appetite.
Investing can help manage the impact of inflation, thus potentially helping us preserve or even grow the real value of our financial coffers over the longer-term. This is critical for long-term goals like retirement, which for many, could be decades away. Nevertheless, it is important to assess our own risk appetite and financial goals when exploring different investment avenues6.
Yet inflation does not affect everyone equally
It is important to note that inflation does not impact everyone equally. Inflation rates tend to vary for different categories of goods and services, and depending on what we consume, price increases for certain consumption categories could affect us more than others. Consequently, the exact make-up of our consumption baskets will likely determine the real impact of inflation, and this can vary considerably across households and age groups.
As an illustration, the most recent Household Expenditure Survey conducted in 2017/18 showed that spending on housing and health care accounted for a significant share of total expenditure among older households – those aged 65 and above – relative to their younger counterparts7. Older households also spend less on transportation and recreation & culture versus younger age groups7.
Accordingly, given the higher share of health care expenditure for older housholds, individuals planning for retirement should pay close attention to health care inflation. This is because the long-term average inflation rate of health care has historically exceeded the long-term average headline inflation rate. Moreover, the consumption of health care goods and services tends to increase with age.
The same can be said about spending on household maintenance, or the purchase of goods and services related to the upkeep or maintenance of one’s housing needs. According to a “Retirement and Health Study” conducted by Singapore’s Central Provident Fund (CPF) Board in 2022/23, spending on household maintenance tends to increase significantly with age8. Surveying over 20,000 Singapore residents on their retirement and health care needs, the study revealed that older households tend to spend more employing domestic helpers to assist with household chores and other caregiving responsibilities8.
Interestingly, the study also found that spending patterns can change meaningfully during the course of retirement. Controlling for the effects of inflation, non-healthcare expenditure tends to decline slightly during the initial retirement years before gradually increasing with age as spending on care services and domestic help becomes more significant8. Aside from prices, the study illuminates that expenses are seldom static and can change significantly over the course of one’s old age. This is something individuals should bear in mind as they plan for their retirement.
Notably, 2022 and 2023 were especially fraught years for price increases, with inflation spanning a broad range of goods and services exceeding the long-term average, although there are signs that inflationary pressure is abating.
That said, inflation can be a volatile series and for long-term goals like retirement, it may be more practical to take a longer-term view. A robust retirement plan should take into account the potential effects of long-term inflation on retirement expenditures while also being cognizant that spending patterns can change significantly over the course of old age.
The bottom-line: invest to manage the impact of inflation
It is important to factor in the effects of long-term inflation and changing spending patterns on your retirement nest egg when designing a long-term plan. While saving regularly is a fundamental first step towards building your retirement funds, investing is also important to help manage the impact of inflation and preserve the real value of money.
Still, investing entails some degree of risk. As such, it is important to be clear-eyed and intentional in the retirement planning process, to ensure that your investments align with your objectives, risk tolerance and time horizon6.