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What is Lifestyle Inflation and Core Inflation? What Are the Differences And How You can Avoid it

Business ,   Information ,   Lifestyle ,   Singapore Personal Finance

by CashOctopus • November 6, 2019

Inflation is a global phenomenon. It affects almost all the countries of the world including Singapore. Most countries experience both core inflation and lifestyle inflation.

Core inflation can be described as the changes that occur in the prices of goods and services. In Singapore, core inflation excludes the prices of private transport by road and accommodation.

Lifestyle inflation occurs when people spend more because they are accustomed to a high standard of living. For example, if you are in the habit of going on vacation overseas every year, then you may want continue in this kind of lifestyle even after retirement. Research has shown that 80% of Singaporeans still want to enjoy the same lifestyle even after retirement. This is not advisable because the amount that they will receive during retirement will probably be substantially lower than their previous income.

 There are several effects of core inflation and some of these are described below.

1. Lower purchasing power of money

Core inflation will cause the value of the money you hold today to become devalued over a number of years. This means that any savings that you have put aside will be of lesser value in a few years’ time. This includes any contributions that you have made towards your CPF account. It will be advisable for you to scale up your CPF contributions so that you are able to counter the effect of core inflation.

2. Leads to more inflation

Unfortunately, core inflation tends to lead to more inflation. This is because many people will want to spend their money rather than save it once they realise that the value of this money is going down. This increase in spending will create an increase in demand for goods and services. This will in turn push up the prices of commodities, hence causing more inflation. You should avoid any increase in spending.

3. Cost of borrowing goes up.

When core inflation rises, the central banks of most countries intervene by raising the interest rates of loans. Once interest rates of loans go up, people will find it more difficult to borrow money. This will in turn reduce the amount of cash circulating in the economy and as a result, the prices of goods and services will go down. However, the central bank will also be keen to avoid creating the opposite effect of deflation. Therefore, they will keep the interest rates at a reasonable level where they can maintain the rate of inflation at the target percentage.

4. More investments in the short term

Core inflation may cause an increase in economic growth in the short term. This is because many people will prefer to invest their money in profitable ventures, rather than allow it lose value in the bank. There will be more money invested in areas like stocks as well as other lucrative investments. You can also choose to contribute towards this boost in economic growth by investing your money in places where it will give you a good return.

5. There is more spending on assets.

Another effect of core inflation is that the prices of valuable assets such as property and vehicles will tend to rise in a few years. Therefore, many Singaporeans may choose to purchase these assets immediately so as to avoid paying the higher price for the same asset in the future.

6. It discourages savings.

Core inflation may create a decrease in savings. This is because many Singaporeans may prefer to remove their money from savings accounts once they realise that the value of the money is decreasing year after year. Some may choose to invest it wisely while others may decide to spend it on assets and other commodities.

7. There is an increase in the rate of unemployment.

Core inflation will require employers to pay their employees higher salaries. This may cause employers to stop hiring employees on a regular basis. In some cases, employers may even be forced to scale down the number of employees so that they can create a more reasonable budget. This means that opportunities for you to get employment in Singapore may decrease if there is a very high rate of inflation.

As the rate of core inflation rises in Singapore, it is important for you to seek advice from financial experts on how handle the above effects so that you are able to rise above it.

Lifestyle inflation is something that you can control individually. It is unlike core inflation which you cannot influence directly. There are several ways in which you can avoid lifestyle inflation. Some of these ways are described below.

– Watch your spending habits.

Be conscious of where you spend your money. Go through your list of expenses and point out the luxurious items that are totally unnecessary. Once you have picked out these items, begin to cut down how much you spend on them. This will help you to maintain a manageable lifestyle and you will not give in to the temptation to adopt an expensive lifestyle even during your retirement.

– Save any increments in income.

If you happen to receive any increments in your salary or income, it is advisable for you to channel these amounts to a savings account which is not easy for you to access. This will ensure that you retain the same lifestyle that you had before the increment. You will also be able to scale up on your savings so that at the point of retirement, you will have accumulated enough funds to live an average life in spite of the inflation rate.

  • Change your friends.

 If you have a group of friends who are used to a very high standard of living, it will be wise for you to avoid their company. This will help you to drop certain expensive habits such as dining out in expensive restaurants or buying luxurious items. It is advisable for you to spend time with those who live a simple lifestyle because you need to learn how to live simply and wisely. This will reduce the possibility of you becoming a victim of lifestyle inflation.

  • Avoid an accumulation of credit cards.

Having access to several credit cards creates a great temptation to overspend. If you want to avoid lifestyle inflation, it is wise for you to stop using some of your credit cards. This will prevent overspending and you will learn how to live on a leaner budget.

  • Learn to make wise investments.

Instead of spending your money on luxurious items, it will be more profitable for you to invest your money wisely. The profits that you earn from these investments will be a great asset to you in your retirement years. For example, if you have a habit of going on vacation every year, then you can skip the holiday and channel the money into a profitable venture.

  • Learn to be content.

One of the best ways of avoiding lifestyle inflation is learning to be content with the basic necessities of life. You will learn to be happy with simple things and this will help you to avoid the pressure of wanting to have an expensive lifestyle.

In conclusion, inflation is part of living. However, you can learn to counter the effects of both core inflation and lifestyle inflation by making wise financial decisions and changing some of your lifestyle habits.