By Billy Cortez
World inflation is rising, an indicator of pickup in global economic growth after its subdued pace last year.
Although it appears that consumer prices are catching up to the reality of a global oil price increase, analysts have noted that consumer spending habits have remained below than what most central banks would like them to be. Observers think that if prices are rising simply because of unsustainable factors like weak currencies, fluctuating commodity prices and financial market speculations, then, a global high inflation won’t translate to stronger economic growth.
Inflation rate is an important economic indicator in the economic life of a nation. It tells us how fast prices are moving up and where the economy is in the business cycle. Moderate inflation is actually good for economic growth; if, for instance consumers anticipate that prices are about to go up, they buy now rather than wait causing prices to rise further. It may defy logic but inflation has always been considered a self-fulfilling prophecy.
Philippine inflation registered a fast clip at 3.3% in February, reported to be the fastest price rise in 27 months. The last time such level was registered was in November, 2014 when inflation was at 3.7%. Socioeconomic Planning Secretary Ernesto Pernia was also quoted as saying that the risks to inflation that we see on the external side “ include increase in the price of oil and the depreciation of the peso.”
Few economic phenomena are scrutinized as closely as inflation. Economists define inflation into two types: Price inflation is when there is a rise in the general level of prices of goods and services over a period of time; monetary inflation is when there is a rise in the quantity of money in an economy. Inflation is feared because it reduces the value of one’s investment as well as one’s salary. As a matter of fact, one of BSP’s main duties is to keep inflation under control. It uses interest rates policy and money supply to achieve this. Whenever BSP sees indicators pointing to a quick rise in inflation, it takes steps to increase interest rates and cool off the economy.
In an inflationary environment, it doesn’t matter whether you invest at the right time or not, but what matters most is you invest wisely so that you don’t lose the purchasing power of the money you worked so hard to earn. Make sure you carefully evaluate every investment proposal that comes your way.
In a rising rate environment, investing in bonds or assets that make fixed payments over a long period of time carries substantial purchasing-power risk. The possibility of a much reduced purchasing power of your money as a result of price inflation is always there. By the time you get your interest income, your money will be worth a little less in real terms. What bond investors do is to stagger or ladder their bonds’ maturities to minimize such risk. Floating rate assets, hard assets like assets tied to real estate do well under this scenario. A 2016 analysis by Limra, a Connecticut-based research group, found that inflation of 2% can erode retirees’ purchasing power by more than US$73,000 over a 20-year period, but if inflation jumps to 3%, that number climbs to more than US$117,000. In a sense, inflation is really one of the biggest investment killers although it’s least expected.
Next time you read about runaway prices, don’t get pessimistic, don’t feel anxious, it’s not a gloom and doom situation. Just make sure you do your homework well and be a more informed investor. With some research and due diligence, proceed to invest your money well, keeping in mind that what you do with your money is just as important as saving it.
Atty. Billy Cortez is an independent board director at First Metro Investment Corporation, the investment banking arm of Metrobank Group. He was formerly FINEX president and chairman of the Capital Markets Development Council. The opinions expressed here are the views of the writer and do not necessarily reflect the views and opinions of FINEX.