Why inflation is important for investors

why inflation is important

There have been much discussion about the inflation in Singapore, and you can check out the latest inflation number from our consumer price index july 2019 update. While, inflation is a number widely reported in the press, not many people really know what inflation is and its implication for investors. In order to know how to start investing in Singapore for beginners, it is important to have a good grasp on the economic situation. 

Inflation is defined as a sustained increase in general price levels and is commonly measured by the annual percentage change in the consumer price index. It mainly consist of a fixed basket of goods and services commonly consumed by resident households. The weights in the basket are updated once every 5 years. 

For one, inflation is not always a bad thing. Most people assume that inflation harms us because it reduces our real purchasing power. What this means is that for every $1000 dollars, we can now buy less goods and services compared to a year ago. While this is true, there is also a potential benefit to inflation that may help Singaporean investors. 

Whe you go to a retail mall managed by Capitaland Mall Trust, you may realise that some of the goods have a much higher retail price than 1 year ago. This hurts the end consumer but will lead to increase in profits for the retailier, if the increment in price does not hurt sales volume. From that perspective, inflation can result in higher revenues which in turn allows CMT to command a higher rent and increase its net income for the year. While there are many other factors that can affect the chain effect mentioned above, inflation makes it easier for corporates to record revenue growths for the year. 

There may be some who will argue that inflation does not help because the revenue growth will also be offset by increases in corresponding cost. However, price increments are not uniform across the entire consumer price index (CPI) basket. When we say that inflation has increased by 1% year on year. What that means is that the prices of the basket of goods has increased by an average of 1%. This means that within the 10 catergories that makes up the CPI basket, there will be some that have more significant price increases than others. Hence, whether the company benefits from inflation has much to do with both its sector and its location within its supply chain. 


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