Inflation clocked in at 9.6 percent in May, a 9-year high, says our banner article today. Citigroup expects inflation to reach 8.3 percent for the entire year. At the core of this economic indicator are two basic things: prices are skyrocketing and our savings and investments are getting squeezed.
Should you be worried? What does a 9.6 percent figure mean?
First, it’s just a hair’s breadth away from double-digit inflation and is the highest since January 1999.
Second, 9.6 percent refers to the increase in prices of a basket of basic commodities consumed by the average Filipino family. If you are in the middle or higher class, your inflation is more likely higher, says the National Statistics Office.
Third, 9.6 percent refers to the inflation pinch we felt last month. That’s in the past. The thing is, we are planning for the future. If this future you’re worried about is your retirement 15 or, say, 20 years down the road, or when your small kids finally get to college, then you should be worried even more.
Fourth, based on the Bangko Sentral ng Pilipinas website, the most common savings and investment options right now in the Philippines do not beat inflation. Money in time deposit accounts earn around 3.0 percent, special deposit accounts for seven days get a little over 5.0 percent, 364-day Treasury bills give a 6.846 percent yield, and a 7-year fixed-rate Treasury bond gives an 8.375 percent yield (all annualized). Even dividends earned from insurance companies are currently around 7.0 percent to 8.0 percent. Bottomline: inflation eats up every bit of earnings coming from our savings.
Everything that we consume gets more expensive by the hour –- that includes gas, electricity, food, movie tickets, medicine and all that. That means our little stockpile of savings’ will buy less and less of these things. If we do nothing with our savings, inflation becomes the silent assassin that might send us all back to our children to live in their houses when we are all wrinkled and grey. (Shudder)
What to do?
- Tweak our portfolio to enhance earnings. Johnny Noe Ravalo says this may still result to losses but doing nothing will guarantee those losses.
- Mon Tejero, head for research and portfolio strategy of Citicorp Financial Services, recommends equities which are traditionally viewed as one of the best hedges to inflation because businesses can pass on rising costs to consumers. Real estate, infrastructure assets and commodities such as gold, oil and agriculture can also protect you from inflation.
- Alijeffty Gonzales, president of ACG Advisors, recommends going short-term to take advantage of higher interest rates and avoiding medium- to long-term bonds. If buying stocks, he recommends picking inflation-proof stocks like food companies and banks. Jeff, however, says overall, inflation should have been factored in the financial plan and should not be a big worry for savers.
- Augustus J.V. Ferreria, senior executive vice-president of Generali Pilipinas, believes that cutting back on spending and saving more will protect people from inflation more than chasing after higher returns.A worksheet created by Maiko Diaz de Revera of Generali shows that even a person with P100 million in the bank earning 6.0 percent interest and faced with 10.0 percent inflation will lose all of his money on the 14th year if he spends all of his interest income year after year.Even if he moves his money to an investment instrument that would give him 12.0 percent, all other things remaining the same, he would still lose his money by the 12th year.
Things get interesting when we assume that this guy decides to save 10.0 percent of his interest income. Even if his P100 million earns only 6.0 percent per annum, he would be able to stretches his retirement fund by two years. Raising that savings rate to 40.0 percent can extends the fund by eight more years.
(Email me at lightdream (at) gmail (dot) com if you want a copy of the worksheet, which Ferreria is giving out for free. Look for my article in the Philippine Daily Inquirer on Monday for more details and explanations on this topic.)
Whatever you do, whether it is to cut back on spending as many Filipinos are already doing according to AC Nielsen, or go after higher returns, stay away from scams offering returns that are too good to be true. Inflation, as Ravalo says in his column the other week, really is the silent assassin that can wreak havoc on our savings, but scams can be even more harmful.
June 6th, 2008 at 3:27 pm
official inflation figures jump from around 4% to almost 10% year on year… what kind of idiotic monetary policy management is that? if this is US or EU, a discrepancy of 0.5% from target would have sent the financial markets into uproar
BSP slashed rates by a total 100 basis points between Oct-Jan, as according to them, inflation last yr “averaged 2.8%”, below their target of 4-5%. the big question is how did they arrive on that obviously misguided figure of 2.8% given the rise in fuel prices since last year.
lowering of rates means increasing the money supply, thus contributing to the rise of inflation.
low interest rate means it’s easier to borrow money. if it’s easier to borrow money, there will be more supply of money, so demand gets lowered. if demand for money gets lowered, its VALUE decreases, hence INFLATION. inflation (of 10% for example) simply means that your P100 yesterday is worth P90 now.
another mind-boggling thing about Philippine monetary policy is how the published inflation rate seems so very disconnected with the inflation felt and experienced by the majority of filipinos. last year, the Bangko Sentral (BSP) said inflation stood at 2.8% — which is unbelievable since fuel has risen by more than 15%, rice and other staple food by 15-20%, and so on…
making a 2.8% figure more of a joke.
the bad thing about such discrepancy is that the numbers from our BSP bozos become OFFICIAL, so our prime lending rate is LOWER than the “actual” (and even the now-rectified) inflation rate. our prime lending rate (set by the BSP) is 7.25%, while our inflation hovers around 8.5-9.6% (official) but could actually be as high as 15% for most people.
so what happens if the lending rate is lower than the inflation rate? it becomes more PROFITABLE to SPEND money (and buy stuff) rather than to SAVE money.
and if most people now decide to spend MONEY to buy STUFF, demand for STUFF increases, and you have INFLATION again.
the cycle continues and good luck to us all.
June 6th, 2008 at 12:38 pm
For me it’s a time of both aggressive frugality and aggressive earning. Doing both makes me feel the effects of inflation less.
Like hvrds said, shifting to a stronger currency can help. Adding to that, I think it’s more important to EARN in a stronger currency. If there was ever a time for someone to consider working on an online business and earning in dollars or euros, now would be the time. After all, if you’re earning P12,000 per month on your office job, you’ll still be earning the same amount even with inflation coming into the picture. Whereas now that the peso is back to roughly P44 to a dollar, I’m getting more pesos for each dollar I earn. Granted, it’s not enough to offset the rising prices of food and energy, and the US dollar isn’t the most stellar currency, but it makes the wounds hurt less.
However, since online markets are probably too saturated, it’d be harder to get in than it was 4 years ago (which was when I got in).
June 6th, 2008 at 11:37 am
High inflation is a crisis and an opportunity. I’m doing Recommendation 2 of this blog. 65% of my portfolio is real estate. I’m into agribusiness and I also invested in oil and mineral stocks. Food and commodities do well when inflation is high.
June 6th, 2008 at 11:12 am
Can i have a copy of the worksheet? Thanks a lot!
June 6th, 2008 at 10:46 am
Commodities would have been a good hedge against inflation. Crude oil is up about 100% vs. last year.
Where can I get hold of proxies for global commodity assets at a retail level? Are local mining/ oil stocks in the PSEi good proxies for global commodity markets? Aren’t these shares being weighed down by weak sentiment on the PSEi? Too risky? Where else can a retail investor go?