The reality of inflation

Written by iMoney Editorial

If you are an average Malaysian, and the topic of inflation comes up, the first thought that comes to mind is the ever-increasing price of daily necessities today. But how much do we really understand about inflation, and how does it affect our purchasing power?

What is inflation?

Let’s get technical for a moment. According to the Cambridge Online Dictionary, the definition of inflation is “a general, continuous increase in prices”. The inflation rate, then, measures the rate at which these prices increase, in a percentage. An inflation rate of 3% (based on the national Consumer Price Index) means that on average an individual’s expenditure on staple goods and services have increased at the rate of 3% over the course of a year.

Inflation at home

With a clearer understanding of what inflation is, how is it affecting Malaysians? According to Trading Economics (as of August 31, 2013), Malaysia’s inflation rate is at 1.9%, moving up from 1.6% last December.

What this means is, the rate at which prices are increasing is slightly faster than last year. However, to curb inflation’s negative effects, the Malaysian government has included some essentials goods in their list of controlled items to maintain affordability of staple foods and goods, to prevent price gouging during shortages, and to slow inflation.

What about purchasing power?

Naturally, purchasing power deteriorates due to inflation. With prices increasing, it is inevitable that the same Ringgit amount has the power to buy you less goods and services than before. Take the humble roti canai example, which used to cost about 70 sen a piece about five years ago, but today it would likely cost you at least RM1 a piece at most mamak.

Classic examples of inflation

You have probably come face-to-face with inflation in your life. A movie ticket that used to cost RM6 when you were a teen is now at least RM10 on weekdays. But what is the reason for the increase?

Inflation can be due to the imbalances in demand and supply. The price of diesel has more than doubled since the early 2000 because the demand for diesel has increased significantly around the world while supply has not increased at a proportionate pace. In year 2000, diesel cost 70 sen per litre and today it costs a whopping RM2 per litre.

Another reason for inflation can be a result of the increase in manufacturing cost. For example, due to the recent petrol price hike, we see other items increasing in price as well. This is due to the increase in transportation cost to transport the goods from point A to B. Consequently, the price of final goods are hiked up over a longer period of time.

Inflation would definitely pinch the pockets of all consumers in the long run, in one way or another. Hence, consumers must pick up smart financial management practices to better navigate through the increasing inflation and its accelerating rate.

How can Malaysians combat inflation and other price increases?

Consumers rarely have much influence on the inflation rate as an individual as it fluctuates in every country. However, what Malaysians can do is be smart about managing their money to outfox inflation and higher costs of living.

“Take advantage of the financial facilities available to avoid unnecessary spending. Even getting the right credit card can make a huge difference in savings,” said Lee Ching Wei, Co-founder and Group CEO of iMoney.my.

“It is also wise to put your savings into investment vehicles that give you returns above the inflation rate. Saving in a savings account with 1% interest at current inflation rates means your savings will still reduce in purchasing power over time. One of the common ways to outsmart inflation is to periodically put away savings in investments that provide you with higher returns than the current inflation rate. For example, some fixed deposit investments earn you more than 3% per year.” Lee added.

According to Lee, acquiring sound financial knowledge can also help you make wise decisions when it comes to saving and making money. Before getting any financial products, be it a personal loan or credit card, compare the options available in the market and select the right product that fits your lifestyle.

Want to know more practical ways to save money? Here are 10 easy ways to save petrol.