Do Any Groups of People Gain and Lose from Inflation?

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ECONIMIC POLICY & THE GLOBAL ENVIRONMENT

Do any groups of people gain and lose from inflation?

What is inflation?

Inflation is defined as a rise in the price of goods and services in an economy, in other words also represents a decline in the value of your current money.(1) It can be measure using the below formula:

Inflation Rate = { x 100 }

CPI (Consumer Price Index) is a measure of the average of prices paid by the urban consumers for a fixed basket of consumer goods and services and is calculated monthly by the Bureau of Labor Statistics (BLS) ( Parkin 8th Edition, Economics, pp. 514). A list of annual inflation rate at Statistics Singapore website shows an increase of inflation rate from 2005 to 2007.(2)

Inflation is generally caused by two theories, Demand Pull and Cost-Push Inflation.

Demand Pull inflation is a result of higher consumer demand for too few goods. It is common in expanding economy where government increase spending and employed workers have more spending power. As demand rise to purchase the same amount of goods, prices increase resulting in inflation.

Cost-Push Inflation is cause by higher production cost resulting in inflation on the price for products and services. It may be due to higher work wages, increase price for raw materials like oil (recent oil surge) (3) as well as corps like rice and flour.

Impact of Inflation

People mostly see inflation as things getting more expensive thus a higher standard of living, however inflation affects people differently.

The Positive Impact
The group of people gaining from inflation will be middle or upper class person with a huge mortgage and a person who hold property. People who took up a big mortgage will have a longer ‘debt’ allowing inflations to increase the value of their property but in the same time paying a fixed amount of installment which value dropped due to inflation. In another words, they are paying lesser and lesser over time. (4)(5)

The Negative Impact
The lower-income person and retirees will feel the impact of inflation negatively. Most coming from this group are low-skilled workers taking on job as laborers and cleaners. Accordingly to a report from Sunday Times (Ee Jamie and Suhaim, 2007) monthly starting pay has fallen by nearly one-third from $860 to $600 between 1996 and 2006. The income has not increase despite the rising inflations proving it difficult to maintain their expenditure on rising basic necessities like food, rent and electricity. It is noted that unlike the middle class worker who are skilled and equipped with required knowledge, the lower skilled workers will have less bargaining power on their wages. Foreign labor influx can also turn company to hire foreign workers for cheaper manpower.(6)

Inflations also impact retirees retiring on a fixed amount of savings. Elderly planning for retirement will have to continually set a higher target for their retirement funds because inflations will cause their savings to ‘shrink’ buying lesser things and paying more for the same quality life they have now. Earlier retirement plans for travel and vacations may have to be put aside as diesel and petrol prices increase. While retirees experience the same impact of the surges of food price as the other groups, healthcare services which take up a bigger portion of their funds compared to younger age group have been subject to inflations as well. According to MAS (Monetary Authority of Singapore) Inflation Monthly 2008 (7) Health care cost rose by 1.0% percent from July to June, hospitalization fees, dental treatment, medicines and health products were more costly. The consumer price index chart in the same report (8) indicated a steady increase in healthcare over 2007 and 2008.

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6. Inflation Monthly July 2008, Consumer Price Index, Table A.1, Monetary Authority of Singapore

This has generally resulted in retirees going back...
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