The Consumer Price Index CPI) for September increased 2.7% from a year earlier. For August, the CPI increased by 2.9%. The Monetary Authority of Singapore (MAS) forecasted that for the whole year 2007, the CPI or inflation will be between 1.5% to 2% and 2% to 3% for 2008.
With this kind of inflation rates, your saved dollar will reduce in value over time if the inflation rates remain above the savings interest rates. Your dollar now buy less compared to the past when the inflation rate was low (i.e. less than 1%).
As investors and for those saving for retirement, what kind of investment instruments will hedge against inflation?
Theoretically, you should be asset owner, such as real estate property, using borrowed money. When you pay your loan, you will be paying with depreciated dollars. This is based on the assumption that your rental income rises faster than the inflation. (“How to beat inflation” by Barton Biggs, Newsweek, 29 October 2007).
Traditionally, gold, art and jewelry would be good inflation hedge.
Stocks are better investment compared to bonds during rising inflation. Bonds pay fixed interest (hence lose values during inflationary periods) whereas, good stocks have the potential for higher earnings and dividend payouts. The careful selection of stocks to invest in is the key to grow your money faster than the inflation rate.
According to the Newsweek article, some companies are inflation beneficiaries: chemicals, energy, forest products, steel, aluminum, owners of great franchises.
Written on 10/28/2007 3:14 PM
Copyright © 2007, the author known as LKT in Singapore.
The material presented is intended to be general and written in layman’s language as much as it is possible. The author shall not be liable for any direct or consequential loss arising from any use of material written. Please seek professional advice from your financial advisor or financial institutions on material written covering financial matters.