How can inflation be good for us? High inflation is a killer!

How can inflation be good for us? High inflation is a killer!

Inflation makes things bad for many people

Everyone hates inflation, I think. They make our money become smaller. When we used to be able to afford more things, now we could afford fewer things with the same amount of money. Anyone without income will find inflation is scary even. As they watch the amount of money in their bank account reducing, they also realize things are getting more expensive. They may even start to think if they should get some income to reduce the impact.

If landlord feels the impact, they will increase the rental

When things become more expensive, the landlord who’s renting out his place would also contemplate increasing the rental. Else, how would he / she be able to cover his / her own expenses which are also increasing? He still want to continue eating his favorite char koay teow too and it’s getting ever more expensive. Meanwhile, the maintenance fees for the condo could be rising because salaries are rising and the replacement parts are also rising too. So, landlord will pass some of these increase to the tenant.

Inflation has its purpose in our life though

When demand for goods and services rises, the supply may need time to cater to these. Thus, prices will rise so that some people who could not afford would choose another alternative instead. Businesses could see the rising demand and also the rising price, they will not invest more money to increase the supply of the goods and services. They will hire more people. These people would have salary to spend and this in turn boosts demand for goods and services further too.

As there are inflation, businesses would also need to pay increments to the employees. When the employees receive these increments, they have more money to spend or invest. With every passing year, the employee who wishes to buy a property will be able to afford a higher priced property simply because they have a bigger salary. It does not necessarily meant they have a higher purchasing power. As value of money gets smaller due to inflation, the amount would have to compensate for this loss in value. A simple calculation.

Someone used to have a salary of RM1,000 and he could afford to eat 200 plates of Char Koay Teow because it’s RM5 per bowl.

If the RM5 increases to RM7.50 per plate , this someone would have to eat fewer plates: RM1,000 divided by RM7.50 equal to 133 plates and no longer 200 plates. In order to be able to still afford 200 plates, he will need to earn RM1,500 instead.

You can see the value of money remains the same (equivalent to 200 plates of char koay teow but the amount has increased from RM1,000 to RM1,500.

The above will thus also explain why property investment is a great hedge against inflation

This is why as people’s salary increase, they can afford to pay a higher amount for property price and the owner of the property who paid the same value but a smaller amount many years ago will now be able to sell their property at a higher price. It’s true, the amount of money they get could be about the same value as what they paid many years ago but it;s also true that now they could sell their property for a higher price. This is what people meant when they say property price increase is a great hedge against inflation.

Why not we have zero inflation, then we have no issues at all!?

Using back the example of plate of char koay teow, if there’s no inflation and everything stays the same price, then tell me, why should we receive salary increments? If there’s no inflation, the company we are working for surely could not increase prices of its goods and services. Without this increase, profit stays exactly the same. Since price stays the same, there’s no incentive to invest to produce more. When the business does not need to invest, they do not need to hire more people. Since there’s no need to hire more people, the char koay teow seller also cannot sell more plates…

So, no multiplier effects happen and the economy stays exactly the same. Maybe worse since people may not be able to get a job since demand is not increasing and thus no one is hiring. Yes, this is a simplistic explanation but it’s best not to pray for zero inflation. It’s better to pray for stable and low inflation. Then everything moves, everyone has more money to spend and investors have higher potential return on investments too. Hope this explains why inflation is definitely good for us as long as it’s controlled and stable.

Just 1 percent increase per year and I will be super happy

If a property price increases by 1 percent every year, the calculation is as follows:

RM500,000 x 1% = RM5,000

Do you know how much we need to invest in order to get the same RM5,000 gain?

Typical FD rate is 3.5 percent. So, RM5,000 divided by 3.5 percent = RM143,000

We need to save RM143,000 in the bank, leave it untouched for 12 months and we will gain 3.5 percent which is equivalent to RM5,000.

How much is the downpayment for a RM500,000 property? Typically, 10 percent and thus RM50,000.

Thus, the Return on Investment (ROI) when the increase is just 1 percent on the property price?

ROI = Return divided by Investment = RM5,000 / RM50,000 = 10 percent return! (Nearly 3 times higher than FD rate)

At the same time, with the property, we either save from paying rental or we gain from someone paying us rental.

Now you know why I just need 1 percent rise every year? Statistically, it’s higher than 1 percent on average every year. Do take a look at below:

Happy knowing why inflation is needed and how it assists homeowners to become richer every passing year too.

Happy learning. 

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