Rising Cost of Living: Keep Your Investment Intact
The cost of living refers to the households’ expenditure on goods and services, including financial obligations, to maintain a certain standard of living.
Inflation, as measured by Consumer Price Index (CPI), reflects the average rate of increase in the price of a basket of goods and services.
It is often used to assess changes in the Cost Of Living (COL).
Purchasing power decreases in tandem with inflation, i.e. a person has to pay more for the same basket of goods and as a result, gets less of it.
It is important to note that CPI or inflation is an approximation of the rate of increase in COL.
While everyone makes a purchase at the same inflated price, their COL differs according to their spending amount. It varies among individuals or households depending on factors such as income level, location, demography and consumption items.
Anxiety about inflation and rising cost of living affect well-being.
With economic uncertainties, the fear of capital loss let some people cut their investment contributions. Is that a wise thing to do?
Inflation in Malaysia has shown a moderating trend since January this year. Our CPI was 2.0% in July 2023, the lowest rate since August 2021.
This lower inflation rate was driven by the slower price increase in restaurants and hotels (5.0%) and food and non-alcoholic beverages (4.4%), followed by miscellaneous goods and services (2.6%).
States that recorded an inflation above the national level of 2.0% include Pahang, Sarawak, Putrajaya, Perak, Selangor and Melaka, whereas Labuan marked the lowest inflation rate (1.1%).
In comparison to other counties, Malaysia’s CPI is lower than the Eurozone and Philippines (6.1%), USA and Indonesia (4.0%) or South Korea (3.3%).
It is anticipated that the current inflation is transitory and will fall below 3% by late 2024. For investors, it is crucial to ensure that their investments are able to generate a rate of return on investment (ROI) above the rate of inflation. Regardless of the positive gain it makes, an investment is losing the real value of money if the ROI is lower than the inflation rate.
Analysis of the World Economic Outlook projects that global growth is expected to fall from an estimated 3.5% in 2022 to 3.0% in 2024.
Regional growth is forecasted to pick up to 2.7% in 2024 as inflation gradually recedes. Job growth is projected to slow in the next few years to just 0.2% per year and prices may increase faster than wages.
Ideally, salaries should increase every year at a minimal rate as inflation rate.
Otherwise, individuals may have difficulty coping with the rising cost of living and impacting their commitment for long term savings or investments.
Building an emergency fund for three to six months of living is a must to prepare for a downturn of economic cycles.
It is also advisable to spend less on imported goods with the weak local currency. Borrowing or loan activity should take into consideration the trading risk and cost of shares margin financing.
Contrary to those who believe they should cut their investment, the best way to beat inflation is to continue investing. Even though the rate of CPI had decreased, it does not mean that the prices of all goods and services have gone down.
Prices for both health and education in Malaysia’s CPI components in July have risen by 2.0%. Any financial plan should not discount the critical need for health and affordable education.
The key of a good investment lies in a diversified portfolio of funds or assets that suit an individual’s investment objective.
A cost effective investment such as an exchange traded fund or a unit trust scheme that charges low fees without compromising the investment performance is a clear advantage.
As a rule of thumb, a good investment portfolio is the one that can shelter through economic climate; be it highs or lows, inflation or recession.
Aside from emergency funds, too much cash savings risk the falls in value over the long term, resulting in loss of spending power.
For investment in a bond or sukuk, its dividend payment is fixed throughout the investment period. A portfolio value may also suffer when inflation rises due to lower value of that dividend income in real terms.
When the market price falls anyhow, bond or sukuk yields may increase and deliver higher investment returns.
Instead of holding too much liquid assets like cash, one should consider investing in tangible assets like properties that historically proved to be inflation hedges.
While equities are volatile in the short term, it helps to fight inflation in the long run. The price of countercyclical stocks for example, appreciated and gained in value during recession.
Some asset classes perform well in inflationary environments, thus smart investors ride the economic cycles with sound investment strategies.
To protect purchasing power against the rising cost of living, keep an investment intact with a solid portfolio of high quality stocks, inflation-indexed bonds, currency hedged funds or tangible assets like real properties.
Written by:
Suzana Md Samsudi, CFP CERT TM
Fellow, Centre for Economics and Social Studies
Institute of Islamic Understanding Malaysia (IKIM)