Tan Kin Lian's Blog: Impact of inflation on financial planning

Monday, December 03, 2007

Impact of inflation on financial planning

Some economists forecast the inflation rate to increase to 4% to 5% during the first quarter of 2008. Many people are worried? How does a higher rate of inflation affect their financial planning?

The increase in inflation rate in recent months is due to some temporary factors, such as the increase in Goods and Services Tax and the sharp increase in oil price. The impact is likely to diminish over the next 12 months.

For financial planning, we have to look at inflation rate over the long term. Over the past ten years, the average was less than 1%. Even if we allow for the large increase expected for this and next year, the average is still lower than 2%. In the future years, it is quite adequate to
allow for inflation at average of 2% a year.

3 comments:

Anonymous said...: Mr Tan,

Why do you use the past 10 years instead of past 5 years or 12 years or 20 years ... Is there a difference?

If every time GST increases, inflation increases, should we factor in higher GST rises after the next election in 2011? (hey, I think I may be the first to predict that GST will increase in year 2012)

btw, how does inflation works, like this?

2001 coffee price 1.00
2002 coffee price 1.02 (2% incr)
2003 coffee price 1.04 (2% incr)
2004 coffee price 1.06 (2% incr)
2005 coffee price 1.08 (2% incr)
2006 coffee price 1.10 (2% incr)

Does it mean that the value of SGD$1.00 becomes SGD $0.82 cts after 10 years with average of 2%?

Is our inflation linked to many of our imported goods from other countries?

What do you think are measures that the government do (like US Fed Reserve) to counter inflation - i think it can be controlled by our "zhenhu" right, rather than by individual?; December 04, 2007 1:52 AM
Tan Kin Lian said...: It is all right to use 10 or 20 years. I chose 10 years because the data was available to me. If I search more, maybe I could get 20 years.

I think that the average inflation over 20 years should still be less than 2%.

You are right - the value of money will drop by 18% over 10 years, if inflation is 2%. But, if you invest money to grow at 5%, you will still get a "real" growth of 3%.

Do not invest in product that have a low rate of return, as it cannot match the inflation.

The government plays a large part in controlling inflation. Individuals can also do their part, e.g. by avoiding unnecessary expenditure, by spending wisely.; December 04, 2007 10:21 AM
Anonymous said...: I think this time round, things will be different, at least for the next 10 years. Historical data for the last 20 years did not take into account increasing consumption from two new fast developing Giants nations, China and India, and impact on global warming on crop production. Both factors have a double whammy on inflation.

On top of these we have central bankers having to deal with economic slowdowns and inflation at the same time. Each requires the interest rate to move in opposite direction. This makes investment on a longer term rather challenging.

The changes in governments (Taiwan, Malaysia, France and soon perhaps the US, Philippines), riots (Tibet, Inner China, Malaysia, Indonesia, Philippines), and threats of war (Korea) have its roots in inflation.

The World will come to a breaking point some time soon. I just hope it will not be ugly.; April 03, 2008 10:35 AM