What is inflation

We’ve been telling people – you have to invest in something that give you at least 6% return a year, otherwise your money is not growing at all.

“Not growing at all?  What do you mean? The money in my fixed deposit account is growing every year!”

Not if you take into account inflation.

Inflation is one of the most important consideration in economics.

It affects bank interest rates – what we get for our savings and what we need to pay when getting a bank loan.  Inflation also affect how much we are paying for movie tickets, teh tarik and petrol.

Economists measure inflation using a few different perspective.  The one that is most commonly used and understood is the Consumer Price Index (CPI).

The index is based on the prices of hundreds of things we usually spend money on and track how these prices have changed over time.  If the annual CPI is 3% – that means on average, the prices of goods and services we buy is 3% higher than last year.

Malaysia – Inflation based on Consumer Price Index. Data from World Bank.

Most people can hardly “feel” inflation on a daily basis.  Even if your regular “mamak stall” increase the price of teh tarik by 10 cents (that’s 10% increase), you will not develop any adverse reactions.

But you will feel differently if you look at the bigger picture.  The recent average of inflation in Malaysia (according to World Bank) has been 3%. With an inflation of 3% per annum, a house that cost $600,000 now will cost $805,349 in 5 tears. You have to pay extra $205,349!

That is the reason we advocate that everyone must invest. And you need invest in a vehicle that can give you more than 3% return a year.  That is so you can at least maintain your buying power.

This video says it all.  It’s an advertisement from a bank in Thailand, and we love those creative advertisements from Thailand.

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