Sunday, May 3, 2015

How Big Is Your Inflation Monster?

One of the biggest fears that financial advisors like to parade around is the "catastrophic effect of inflation eroding away your purchasing power". In most cases and in most times of our modern history, that has been a good call to action to get people more involved in investing to protect their own wealth.

But what if this inflation boogeyman that everybody speak off is just a figment of our imagination?

Now, I'm not a COMPLETE idiot. Inflation is a problem and something we should always take into consideration. I'm not saying it isn't. Inflation is bad because it reduces real purchasing power.

My beef with this whole "inflation scare" is the degree and severity of the problem that people claim it to be. Having a cold or cancer both makes you sick, but of course, only 1 of them is worth worrying about.

We need to know if what we are dealing with is an cold or a cancer.

What are most major economies dealing with? For most, disinflation, for some, outright deflation. Surprise!

Yes, that is the opposite of inflation. If inflation is bad for your money, then deflation is good for it, right? Well, I seem to think so, but most economists disagree with the likes of me and instead believe that low levels of inflation should be maintained. I don't see the problem with things getting cheaper, but what the hell do I know?

Many argue that US is dealing with inflation much better than Europe and they also have much more economic strength (I personally doubt), which is why the US has much higher interest rates than Europe. Sorta makes sense, I suppose.

However, we do know that if we use the eurozone definition to calculate US inflation, they are in the same sinking ship. Another plus point for US exceptionalism. (And they absolutely cannot afford to go into deflation, here is why) You don't have to believe me, I didn't make the graph. Soc Gen's strategist Albert Edwards did.

Okay, that's all fine and dandy. Most developed economies are plunging into deflation. Whatever. Who gives a shit? That doesn't have anything to do with us. The important thing we want to know is about Singapore! What about Singapore? That's where most of us have our money. Well, that's a very good question to ask.

I headed over to Singstat and extracted out the monthly Y-o-Y time series and I made a graph to correspond with the time frame in the first graph, Jan 2012 until Mar 2015.


I have 2 problems with people calling upon the inflation boogeyman as their main reason to invest:

1) All their arguments break down and mean the opposite if we are in deflation rather than inflation
2) Forcing people to take risks in risky asset classes (stock market) that they don't understand can be far worse than whatever they lose to "inflation erosion"

If people understand that they can get raped 50% if the stock market crash or they would only get their purchasing power eroded 2% a year, which option do you think the risk-adverse investor would take?

Now, instead of decreasing purchasing power 2% a year, how about increasing it by 0.3% a year? (Mar 2015 records deflation of 0.3%)

Personally, I rather sit my ass in cash and MAYBE lose purchasing power through inflation (which we know is NOT happening) than to take the risk of going into the stock market at these nosebleed valuations.

What's the opportunity cost of me waiting? Inflation is negative. 10 year stock expected returns are basically zero. I should sit in cash for AT LEAST the next 10 years, unless there is a stock correction.

So yeah, I'm letting the "inflation monster" attack my money. But for some reason, the inflation monster looks like a little, fat, fluffy rabbit nibbling on an indestructible $2 plastic polymer note.

Have fun, you silly stupid rabbit.


  1. Dear GMGH,

    Thanks for the info and have been reading your blog these days tbh. :)

    I like your post on the OCBC 360 review.

    Btw I can't see your photo for the Singapore deflation, but I believe is think link which u posted:

    Probably u wanna fix it thanks!

    Have a blessed weekend :)

    1. Hey Eye of the Storm,

      Thanks for the comments and pointing out the broken link! Have a great weekend too!

  2. Thanks for blogging into this. Is good to take time to review our assumptions. two things caught my eyes.

    1. CPI is really Core. I doubt in today Singapore Standard of Living we can live by CPI. Maybe is me only :)
    i would prefer general inflation index.

    2. We may need to look at the whole story and not just a scene. So it will be safer to use historical data back say 20 years instead of months.


    1. Hi Cory,

      I am not affected by private transportation either, but 1 in 2 households in Singapore own private transportation, so I am a bit on the fence whether it should be included or not.

      However, accommodation is still used by us. The MAS Staff Paper details the exclusion of accommodation and private transportation from CPI due to unpredictability of government policy. But do their prices still affect people? It is just my feeling, but I think they still do.

      That said though, the CPI and Core Inflation still tracks closely and the current data of both are pointing towards very low levels of inflation. CPI does tend to overshoot core and be more volatile, but perhaps core will start to drop as well.

      I do agree that historically inflation is more cancer than cold, but I am just tossing up the possibility that perhaps this time is different. Low levels of inflation after rounds and rounds of monetary expansion? Maybe things really are a whole lot worse than what it seems on the surface.


Observe the house rules.