[Python] How Much Should Your Investment Be Returning In Order To Beat Inflation?

By The Boy Who Procrastinates - July 27, 2019


As I was raised in a frugal family, the idea that saving is a virtue has stuck with me since young. For that reason, the habit of squirreling money away in my POSB savings account came naturally to me. 

So when people around me eventually refuted my belief and pointed out that the purchasing power of my savings was being eroded by inflation, I have maintained a skeptical view about it. 

But of course, who am I to kid? Over the years, I too, have had my fair share of experience with inflation. The price of my favourite Koka noodles has been creeping up and visits to the clinic was no longer as cheap as it used to be. 

Now, don't get me wrong. I am not saying that stashing cash away is an undesirable financial practice. But when the interest rate earned from savings accounts (0.05% at that time) was exceeded by the prevailing inflation rate, the money is just not working hard enough

With all this talk about inflation, it is probably pertinent to have an understanding of where the inflation rate stands. Ideally, this should form the lower limit at which your money should be reaping to overcome the ravages of inflation. 



Calculating Inflation Rate

To start with a dash of economics 101, inflation refers to the increase in prices of goods and services over time. It reduces the purchasing power of each unit of currency with the rise in general price level. 

One conventional measure of inflation rate is the annual percentage change in the Consumer Price Index (CPI). The CPI captures the cost of a fixed basket of goods and services commonly consumed by households over time. 

Therefore, the computation of inflation rate is derived from the percentage change in the CPI in one period to the preceding one.  



Inflation Rate Chart

Using the data from Singstat, I have plotted a few charts using Python Plotly, which is much easier to work with as compared to Bokeh which I have used for Exploring the Viability of Flipping IPO. A clearer diagram can be referred to through the hyperlinks below the charts. 

There are options of interactive tools at the top right hand corner of the charts. Hovering your cursor on the line graphs will reveal information of the data point for each category. Users may click on the legend at the side once to select or deselect that specific category or double click to isolate one trace. 
The above chart illustrates the trend of Singapore's inflation rate over the years. 

The All Items category covers the inflation rate for all the goods and services in the CPI basket. This can be further broken down into some of the broad and minor components that we can usually relate to, such as Transport and Alcoholic Drinks & Tobacco

The inflation rate movement in the course of time documents some historical events that Singapore has gone through as a country. Interestingly, the inflation rate trend for All Items has reached the highest point at 22.37% in 1974! This correlates to the 1973 Global Oil Crisis when the Arab oil producers imposed an embargo against the United States which sent the price of oil quadrupling and consequently led to global inflation. 

Thereafter, the inflation rate has climbed to 8.54% in 1980 primarily due to the 1979 Oil Crisis. In the wake of the Iranian revolution, the oil production in Iran was greatly curtailed and the ensuing panic eventually drove the oil price upwards. 

To put a ballpark figure on the inflation rate, we can compute the following statistics based on the data available:
  • Historical Average Inflation Rate: 2.57%
  • Average Inflation Rate for the last 20 years: 1.46%
  • Average Inflation Rate for the last 10 years: 2.11%
  • Inflation Rate in 2018: 0.44%
From the chart, the inflation rate is oscillating within a narrower range and appears to be more manageable in recent years. But does it truly match with our firsthand experience with rising retail prices? 




How Much has Prices of Goods and Services Changed over the Last 20 years?

As an alternate perspective to the inflation rate trend, the examination of how prices of consumer goods have changed over the last 20 years is probably more intuitive and easier to interpret.

Using the CPI of 1998 as the base year, a chart can be plotted to analyze the change in price level over the years. 

The price level of the Alcoholic Drinks & Tobacco category has the steepest gain of 129.20% (more than double) since 1998, likely contributed by the increase in vice taxes, such as liquor duties and excise duties for cigarettes, over time.


Increment in price level for Education, which mainly comprises of tuition fees as well as textbooks and other study guides, has come in second at 90.02%. There are some who can probably recollect the recent tuition fee hike by all 6 Singapore universities last year. It was further reported that university fees have largely gone up every year since 2010Reputed for achieving top global education rankings, Singapore's internationally acclaimed education system sure does not come cheap.

To put that into perspective, the price level for All Items has only been raised by 35.42% in the same time period. 

For those who are interested in the breakdown of the major and minor components of the CPI, you may refer to the Information Paper for more information. 


Transport


Singapore has marked its sixth straight year at the top of the ranking for being one of the most expensive cities in the world. The key component that puts Singapore on the list is undeniably the astronomical cost of owning a car, mainly due to Certificate of Entitlement (COE) system.

However, the COE price has not always been this exorbitant. In 2009, it has dropped to as low as $1,020 for Category A cars (discounting the $2 COE premium in 2008). 

According to the above chart, it should come as no surprise that the COE has reached the highest premium level at $92,100 for Category A (Cars with engine capacity of 1600cc and below) and $96,210 for Category B (Cars with engine capacity exceeding 1600cc) in Jan 2013. 

The sharp spike in COE price is effectively due to the change in the formula for COE quota system in 2010 which led to a drop in the COE supply.

The price level of Public Transport, on the other hand, has been rising steadily over the years, marking 29.7% increment over the last 2 decades. Bus and train fares have recently been revised upwards in Dec 2018 with commuters paying up to 10 cents more



Health Care


The spiraling cost of health care in Singapore has been making headlines in recent years and has remained one of the major concerns for most Singaporeans. 

Based on the CPI data, the price level for Medical & Dental Treatment has been raised by 72.85% over the past 20 years. A separate study conducted by Mercer Marsh Benefits reveals that Singapore's medical cost inflation was at 10% last year. Experts have commented that the expansion of insurance coverage could have been a factor that pushed up the demand for healthcare and drive up inflation

In a bid to curb over-consumption of medical services, the Ministry of Health has mandated the incorporation of a co-payment of 5% or more for the new Integrated Shield Plan riders last year. It remains to be seen if the new policy is effective in keeping the premiums for health insurance in check.





MAS Core Inflation Rate

First introduced in 1984, the MAS Core Inflation is another key measure of consumer price inflation that the central bank pays close attention to. It is derived from CPI-All Items Inflation by excluding the costs of accommodation and private road transport. 

The cost of a private transport is significantly influenced by government policy targeted at managing road congestion and is predominantly determined by the supply and demand for new vehicle licenses through a bidding process. 

Meanwhile, the bulk of the accommodation cost consists of imputed rentals on owner-occupied accommodation which refers to the expected rental that a house owner is willing to pay to live in his or her own house. Given Singapore's high home ownership rate, most households do not incur rental expenditure.

Therefore, by abstracting from the relative price fluctuations which emanate from the housing and car markets, the MAS Core Inflation is able to better capture more persistent price movements, making it less volatile than its counterpart, the CPI-All Items Inflation.

The MAS Core Inflation is generally reported on a year-on-year basis. That is, the CPI for a specific month is compared with that of the same month for the preceding year. 

Based on the chart, we can observe that the fluctuation of the Core Inflation is less pronounced when set side by side with the CPI-All Items Inflation as it is mostly bounded within the range of 0 to 3%. 

Similarly, computing the key statistical figures of the MAS Core Inflation Rate reveals the following:
  • Highest Core Inflation Rate: 6.50% in June 2008
  • Historical Average Core Inflation Rate: 1.68%
  • Average Core Inflation Rate for the last 20 years: 1.61%
  • Average Core Inflation Rate for the last 10 years: 1.45%
  • Core Inflation Rate in June 2019: 1.17%


Closing Thought

Inflation, a perennial concern among Singaporeans, is nevertheless desirable at a manageable level. 

Persistently high inflation can be damaging to the economy. With the rise in price level for goods and services, workers will request for higher wages to maintain their purchasing powers. By acceding to their demands, employers have to charge higher prices for their goods and services to cover the increased staff cost. This will result in a wage-price spiral which can prove to be challenging to reverse. 

In contrast, a little dose of inflation helps to reduce the risk of deflation (ie. falling price). When that happens, consumers will hold off their purchases in anticipation of lower price, leading to lower production, layoffs and a faltering economy. 

With that said, an environment of low and stable inflation is essential for sustained economic growth and it is here to stay.

Taking reference to the MAS Core Inflation, I would think that investors should aim to achieve at least 1.7% annual returns on their investment in order to safeguard against the ravages of inflation. 



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Disclaimer: Kindly note that this is not a sponsored post. The author is in no way affiliated with any of the mentioned institutions and does not receive any form of remuneration for this post. The Boy who Procrastinates has compiled the information for his own reference, with the hope that it will benefit others as well.

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2 comments

  1. For some years I have refused to buy into the standard inflation/deflation arguments.

    What goods are bought today because of the expectation that next year they will cost more? Apart from housing I do not believe that thought process goess through anybody's head except in 3rd world indebted and mismansged countries with inflation in the 10% ++ range.

    And even though we know with absolute certainty that next year tech products will be even cheaper with more features, we still buy today.

    Indeed, falling prices can increase the amount of consumerism. An example are the flights now available through Scoot or Air Asia. Twenty years ago flying was expensive, now we can fly to Bangkok or HCMC for just a few SGD's.

    Humans are now becoming incredibly efficient at growing and manufacturing stuff, transporting it cheaply and quickly around the globe. I reckon zero inflation or less should be the norm.

    The rampant price increases for education I fail to understand. Where is all the money going to? Using modern technology the price of education should be falling, not rising exponentially. It has occured in online education, so why not in the institutions where you have to be physically present?

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    Replies
    1. Hi R P,

      If I were to make an educated guess, my opinion is that one of the factors that has contributed to the rise in the price level for education would be the labour cost in Singapore.

      From a quick overview of the NUS financial reports, it seems that the number of faculty members and staff has increased 57.14% from 2008 to 2018 and the corresponding wages and salaries expenditure has risen 95.52% over the same time span.

      With the advancement of technology, I would think that universities have to spend more in retaining the right teaching professionals armed with the relevant knowledge. There is, of course, many other contributing factors as well, such as purchasing of research equipment and teaching aids, etc

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