Inflation – What is it and why is it important?

Singapore has been experiencing low inflation rates for quite some time now. Surveys show that July 2016 marked 21 consecutive months for lowering inflation rates and Singapore has recently been experiencing its lowest inflation rate in 30 years. What does this all mean for the economy, businesses, and the average person?



What is inflation?

Inflation in its most basic terms is the rise in cost of goods and services and the decrease in spending value of money. Deflation has the opposite meaning with a decrease in goods and services but an increase in the spending value of money.

Without looking any deeper, deflation sounds pretty good for the common person doesn’t it? Don’t be so quick to make that judgment. Low inflation rates that get closer and closer to deflation has its own set of serious problems that are harder to fix than inflation is.



Why is low inflation bad?


– Low inflation could indicate low economic growth –

When there is low inflation, there is a pressure to sell goods at a lower cost in order to encourage people to spend on it. After all, your competition is also selling at a lower cost so to remain competitive, you must follow suit.

This process ends up giving businesses smaller profit margins and therefore, less money to invest, spend, and/or hire. The dangers of lower profit margins squashes innovation and discourages company growth which translates into an under stimulated economy and low economic growth.


– A spiral of lowering prices –

You’d think that lower prices would be exciting and useful for the everyday person. When things are cheap you spend more, right? In the short term this may be true. But falling prices actually encourage people to wait on buying luxury goods because people are waiting for prices to fall even farther. This process may make things seem more affordable to the average person but dangerously low prices again translate into lost business profits which discourages product innovation, job creation, hiring, and wage growth.

If you never receive a promotion or wage increase at your job, does it really matter that things are more affordable? What about your fellow Singaporean who gets laid off because their company is losing profits?


Low prices doesn’t translate into a better living environment


– Bad for Singaporeans in debt –

Usually with inflation of 2 to 3% per year, the inflation offsets the amount of interest you have to pay on your existing loans. When there is no inflation, nothing gets offset. The percent of your income you have to spend on your debt leaves you less to spend on everything else which ends up being bad for everyone.


If you haven’t noticed, all of the factors of low inflation are interrelated. Low inflation means that goods and services are cheaper and the continuing trend means that things will continue to become more affordable. At first, this seems really great for the average person but it eventually cuts into business profits which in turn affects everything else. It becomes very hard to have economic growth.


People end up selling off their investments for not giving a profitable return which also affect business growth. Others see their fellow citizens being laid off and are afraid of what it means so may hold onto their money as an emergency reserve for themselves. None of this is good news for the economy or overall well-being of Singaporeans.



What can you do about it?


What you can do is educate yourself to understand the policies and practices your government may have to resort to in order to stimulate the economy and fight against low inflation rates.

The target inflation rate is 2-3% in developed countries and government have several tactics to meet those rates. Read up on what those are and make sure you become an informed citizen. It will be for the good and benefit of all who are affected.






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