Inflation Ate My Chicken Rice

Credit: Alpha

You can’t be serious”, I said to my barber.

It was only $10, when I came in for my haircut last month. How can you possibly charge $12 for the same job now?

Have consumer prices in Singapore really gone up by a-fifth in the space of just 30 days? “This is Singapore, not Zimbabwe”, I muttered under my breath.

But that is the reality of the direction of consumer prices here in our Garden City. The headline figures might suggest that consumer prices are on the decline. But there is an undercurrent of inflation all around us.

Truth is, inflation manifests itself in different ways. Not all of them are immediately obvious, though.

Finger on the pulse

One day last week, I visited one of my favourite chicken-rice sellers in bustling Chinatown. The food, as always, was excellent. But there was something unusual about my meal, which I couldn’t quite put my finger on, at the time. But I soon did.

Later in the day, it hit me, when my stomach was asking if my throat had gone on strike. The portion of chicken rice on my plate, you see, was smaller than before.

Admittedly, the price had not changed. But there was definitely a little less meat on the plate, than I remembered from previous visits.

Instead of raising prices overtly, the vendor had achieved the same result by serving customers a little less chicken. It is surreptitiously sneaky but elegantly effective.

Short-term fix

As far as the hawker is concerned, the ploy can be a useful short-term fix to a knotty long-term problem.

But at some point, consumers will realise that inflation has eaten into their chicken rice. Or as Abraham Lincoln once said: “You can fool all of the people some of the time, and some of the people all of the time, but you cannot fool all of the people all of the time.

Apart from consuming my chicken rice, inflation has a fantastic way of eating into our capital, too.

Warren Buffett once pointed out that it makes no difference if someone pays 100% tax on interest of 5% in a deposit account during a period of zero inflation or pays no income taxes during years of 5% inflation. The end result, Buffett pointed out, is identical.

Simple arithmetic

Either way, the saver comes away from the deal with no “real” income, whatsoever.

The arithmetic makes it plain for all to see. Any money that is spent from the savings account comes right out of capital. The capital has, effectively, been eroded by inflation.

It might not seem obvious at first. But just as a hawker might get away with reducing portion sizes initially, the chickens will come home to roost, eventually.

A time will arrive when the chicken portions could get so small that they could comfortably fit onto a child’s pretend-play tea set. By then, it will be too late.

The same goes for our capital. We need to not only protect it, but find ways to make it grow faster than the rate at which prices are rising.

One of the best ways is to invest the money in assets that can beat inflation. Over the long haul, that means investing in shares.

Is it risky?

However, some people tend think of stocks as being risky, while cash is deemed to be the safest. Almost every textbook on investing will try to tell you that.

But over the long haul, stocks are probably some of the safest. And the reason for that is… inflation.

Thanks to even moderate rates of inflation, a store of cash is guaranteed to lose value over time. But a portfolio of properly chosen shares could appreciate over the same period.

Of course there will be stock-market crashes along the way. But price fluctuations, which are often seen as a proxy for risk, are not dangerous.

Inflation is the real danger

Stock prices fluctuate – that is what they do. Some might fluctuate more, while others might fluctuate less. But fluctuate they will. Since 1988, the Straits Times Index (SGX: ^STI), which has also been volatile, has, nevertheless, delivered an inflation-beating annual total return of around 7%.

The danger for us investors, though, is not whether stock prices fluctuate. If you want an investment whose price does not fluctuate, then cash should do nicely.

But the downside to that “niceness” is a permanent loss of purchasing power. That is a bigger risk than any short-term fluctuation in stock prices might ever cause.

A version of this article first appeared in Take Stock Singapore. Click here now for your FREE subscription to Take Stock – Singapore, The Motley Fool’s free investing newsletter.

Written by David Kuo, Take Stock - Singapore tells you exactly what's happening in today's markets, and shows how you can GROW your wealth in the years ahead.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.