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[Fin Talk] Winning Big Time Against Inflation

By Arlyn Tan

Inflation Rate in the last 2 months ( March and April) was at 4.5%. This is beyond the BSP target rate of 2 to 4%. for 2021. The inflation rate is the speed at which the prices rose during a period. Inflation is the overall general increase in the price of goods and services in an economy and shows the decrease in purchasing power of the peso. In general, the target inflation rate for developed countries is 2% and 4% in emerging countries.

When you see this rate, it means different things to families, investors, institutions and the government. For the month of May, the rising inflation is due to the price increase of pork secondary to increased tariff. Oil and utilities costs also increased due to the reopening of the economy.

With the same take home pay of the breadwinners, it can buy a smaller volume of food, grocery items, vegetables and meat. Education and medicine or health care inflation rates are higher compared to those of food and commodities. Thus, there is a need to either increase the income or preserve the value of money so as to cope with the rising cost of living.

On one hand the response of individuals to increased inflation is to buy now before cash loses value. For them, stocking things can create value. The consequence is a behavior which decreases the saving rate and provides incentive to spend, which in terms spurs economic activity.

For businesses, the increased cost of raw materials and services may not be passed to customers. This results in lower profitability.

To prevent the excessive effects of increased prices or hyperinflation, the government uses monetary policies to temper the excessive buying of individuals. This is through the adjustments of interest rates which in turn affects the borrowing costs, earnings from bonds, and bank deposits. The BSP increases the rates to make sure that you are motivated to put money in the bank to earn interest rates.

However, the BSP has stressed that it will remain in its accommodative policy ( limited increase of interest rates) and stay at 2% levels even when inflation is on the rise.

To preserve the value of your money or hedge against inflation, here are three strategies that you can consider:

1. Find additional sources of income through entrepreneurship. Make sure to stay within budget. Increasing cash flow does not equate to increased expenses. By making sure that you have incorporated inflation into the future value of your financial targets (i.e tuition fees and retirement funds) , you will not run short of funds when you reach that particular lifestage.

2. Invest in financial products that have higher return than inflation rate which you can peg at 4.% as the high, 2% as the low. Invest in blue chip or dividend paying stocks where you can find the balance of risk and reward. Short duration fixed income instruments can also provide.

3. Diversification of stocks geographically and based on asset classes. When the economy of the Philippines is experiencing a decline in the purchasing power of money, other economies like the US can provide positive returns. There are instruments that are favored in every stage of the economic cycle.

  1. Recovery Phase: inflation is falling, stock market rising, bond yields bottoming, property prices bottoming

  2. Early Upswing Phase: inflation remains low, stock market & commodities strong, property prices picking up

  3. Late Upswing Phase: inflation picks up, stock market bottoming & commodities rising strong, property prices rising strongly.

  4. Economy Slowdown: inflation, continues to rise, stock market falling, bond yields & property prices tops out

  5. Recession: inflation peaks, stock market bottoming, commodities weak, property prices weak.

Winning big time against inflation is like winning as an elite athlete. You need a coach to strategize your financial game plan. The coach needs a team to support his strategic plan. The team is composed of institutions, portfolio management team, fund managers, stockbrokers, realtors, and financial advisors. And you need to have the discipline to study, invest and monitor your progress. With this ecosystem, you will surely beat inflation year after year.

Arlyn Tan is a Strategic Wealth Consultant. She helps individuals and organizations on how to maximize the value of their money through risk, health & wealth management. Her mission lies in making sure that clients achieve 3 things. First, they reach their milestones on time with sufficient resources. Second, they protect them from the impact of economic losses secondary to unexpected events. The third and most important is that they enjoy meaningful and balanced lives.

LinkedIn/Twitter: Arlyn Tan

FB/IG: @pinnaclefinlitcoachph

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