So what exactly is inflation?
Inflation is the increase in prices of good or services over time.
Inflation leads to higher prices and lower purchasing power. It is a monetary phenomenon that is caused by a country printing more money that it's justified by the country's wealth. When more dollars are issued for a limited amount of assets, the value of each dollars is decreased.
Let's see what is Warren Buffett says..
As mentioned in my earlier post about my goals of wanting to have $1,000,000 by 42 (which is 23 years later). I went to do a check on the inflation in Singapore from the past years and was directed to the MAS website. From the website, I'm able to find the Inflation Calculator, which I proceeded to calculate how much $1,000,000 would be 23 years ago.
As our purchasing power is affected by the inflation, our purchasing power of $1M (23 year ago) will be equivalent to only $689,556.24. This also mean that for every of my dollars I've kept over a year, it provides me a negative return of 1.6%
This also means that with the interest rates bank are providing for your savings in a normal savings account of 0.05%, your money is being eroded by the increasing prices of goods.
Now the core inflation for Singapore at about 2%, and factoring in it, $1,000,000 will only gives you $641,170.69 of the purchasing power in 2040.
Stocks can beat inflation over time because companies can raise prices to account for rising costs brought about by inflation. When companies increase their prices, their revenues and earnings also increase. The higher the earnings, the higher the valuation, which leads to higher share prices. However, should your investment turns out other wise, not only does it mean that you'll be further away from escaping the rat race to be financially free, it also means that your savings is further eroded by the bad choice you've made. There's many different types of investments that's available in the market apart from stocks.
As such to beat the core inflation your investment will have to generate a return of >2%. This will only prevents your dollars from going smaller in the next years. To generate more out of your investment, it will mean that your investment returns has to be 4% or 5% or even 6% (a conservative returns for your investment).
Without investments, Buffett will not be as wealthy as you see today. So is inflation a good thing??