Cost-push Inflation hurting consumers

The current inflation faced by most economies is not the type known as “demand-pull” inflation, where demands for goods and services rise because of buoyant economies and when the consumers feel wealthier.


This inflation facing us is one known as “cost-push” inflation. The prices of goods and services rise as a result of higher raw material costs, labour costs, infrastructural costs, transportation costs, and costs of borrowings.


The high cost of oil has a knock-on effect on anything that requires oil, such as transportation costs and electricity costs to power production plants. Consumers have to pay for higher transport costs, higher electricity costs to power homes, and costs of food, as a result of higher costs of production.


The latest worry among consumers is the higher costs of food such as rice, wheat, corn. This is due mainly to limited supply arising from weak productivity in farms and unfavourable climatic conditions such as droughts in Europe and Australia in recent years. Wheat, rice and corn prices have more than doubled in the past 2 years. (Source: TIME, 5 May 2008).


I went to NTUC Fairprice, Toa Payoh, to buy a 5-kg pack of rice this afternoon. The price of my usual brand of rice has risen to $9.20. This was a substantial increase from what I am accustomed to in the past. So I took a look at house brands with the hope to reduce cost. To my surprise, the cheaper alternatives were sold out. This is reality.


If you eat out often like me, you will also notice that hawker food have increased by 20 cents to 50 cents. Most time a meal of $2 to $2.50 will be sufficient. Now, you face with $3 or more for a similar meal. This was borne out by the fact that food prices rose 7.6% in March 2008. (See my earlier post.)


Consumers will be cutting back on buying discretionary goods and services to ride out this inflation. The US consumers are doing the same after they saw their wealth eroded in recent one year because of sub-prime mortgage crisis which have also affected the broader economy. In addition, the world now starts to worry about food crisis. This is trying time for both governments and people round the world. For those better off, you may want to lend a helping hands for the less well off.


Written on 4/28/2008 1:54 PM


Copyright © 2008, 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.

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