Inflation sensation

Question: All around the world, people are talking about how the pandemic and the Russia-Ukraine war are leading to supply bottlenecks and inflation. As a result, central banks are starting to implement rate hikes. Can you first give me the basics of this thing called inflation that is suddenly on everyone’s mind? Answer: What is really inflation? Let us look at the historical cost of making a call at the public phone booth.

Way back in 1978, the musical group Apo released their unforgettable song, “Pumapatak na Naman ang Ulan.” In the song, they related how making a call would cost 30 centavos.

Fourteen years later (1992), the song “Tatlong Beinte Singko” as sung by Dingdong Avanzado was released. From the title itself, the cost of making a call at a public phone booth jumped to 75 centavos.

If we compare the two prices, it translates to an effective 6.76 percent per year rise in the cost of making a call. That is pretty high compared with the country’s recent inflation numbers.

But is inflation really the big bad wolf? To be sure, inflation is a highly debated topic. Many economists say that moderate inflation is good as it helps increase an economy’s output on the assumption that the economy is not yet running at full capacity. Theoretically, more production brings in more money, which eventually leads to more spending. In turn, more spending triggers more production and so goes the virtuous cycle.

If we were to translate this to the common Juan, when the cost of living goes up, Juan is compelled to increase his income by working harder. If he sticks to one job, he could hope to get a meaningful pay increase.

Realistically though, if the additional income that Juan is able to generate is just enough to counter the impact of inflation, he will have just maintained his lifestyle. If Juan wants to improve his lifestyle either by necessity (e.g. because his children are growing up and need to go through costlier higher education) or simply by desire, because he wants to wear better-looking clothes, drive his own vehicle or even travel abroad for vacation, he will need to earn much more to overtake inflation and the cost of a higher standard of living. Juan will probably need to work extra hard at his job in the hopes of getting a promotion or take on a side hustle to increase his cash flow.

But the body and mind have their physical limits. That is why another way to beat inflation and also enjoy more in life is to save. If Juan could save a lot, then keeping money in a deposit account bearing a low interest rate may suffice. The reality is that Juan, just like many others, can only save small amounts at a time. It is in this kind of scenario where investing such savings can prove to be valuable. Investing in a business is an option, but not an easy one as doing so will divide Juan’s attention, which could lead to a loss in the business, the loss of Juan’s job or both. In addition, it may take years of savings to put up the capital required.

An alternative is to invest in financial securities. Nowadays, such investing need not be complicated as professional management can be had from products and services ranging from pooled funds for the retail investor (e.g. mutual funds, unit investment trust funds, single pay variable unit-linked insurance) to investment management and investment advisory as well as monitoring accounts for the high net worth people. You can readily search for these products and services on the internet or ask your favorite financial planner.

The important thing to remember is that an easier way to prosperity is to invest, not only to beat inflation but also to enjoy a higher standard of living. But as it has always been, prosperity begins with “S” and that is saving. INQ

This question was asked at “Ask a Friend, Ask Efren” free service at www.personalfinance.ph, SMS, Viber, Twitter, LinkedIn, WhatsApp, Instagram and Facebook.

Efren Ll. Cruz is a registered financial planner and director of RFP® Philippines, seasoned investment adviser, bestselling author of personal finance books in the Philippines and a YAMAN Coach. To consult with a YAMAN Coach, email [email protected]. To learn more about personal financial planning, attend the 96th RFP Program this June 2022. To inquire, email [email protected] or text at 0917-6248110.