As Singapore moves towards living with COVID-19, the Monetary Authority of Singapore (MAS) is expecting to see a sustained economic recovery.
The upturn in fortunes, however, is expected to come with higher inflation.
Inflation represents the rise in the prices of goods and services, thereby eroding the value of your purchasing power.
As a simple example, the price of a cup of coffee may rise from S$1.00 to S$1.05 if the country experiences a 5% inflation rate.
On Thursday, Singapore’s central bank moved to curb the impact of rising inflation by raising the slope of the Singapore dollar’s nominal effective exchange rate.
In essence, the Singapore dollar is allowed to rise against a basket of foreign currencies, therefore strengthening the nation’s purchasing power.
Core inflation in August rose to 1.1% year on year, a two-year high, and has remained positive for seven consecutive months.
With inflation remaining persistent, how should you protect and grow the value of your money?
Incoming: An era of higher inflation
It’s tough to evade the effects of inflation as Singapore is not alone in experiencing rising prices.
In the US, the Federal Reserve is widely expected to announce a tapering of its stimulus in November, along with a potential hike in interest rates next year.
A surge in energy prices has given the US central bank reason to be concerned over inflation.
The chief economist of OCBC Bank (SGX: O39), Selena Ling, has pointed to numerous reasons for the persistent upward pressure on prices — supply chain bottlenecks, higher energy prices, and a foreign manpower shortage.
We have seen the impact of higher prices locally.
90,000 Singaporean households are expected to face higher electricity bills after electricity provider iSwitch abruptly announced that it was exiting the local market.
A second electricity provider, Ohm Energy bowed out of the market a few days later, citing unsustainable market conditions arising from a surge in the cost of electricity.
The official forecast is for inflation to hit a maximum of 2% for 2021.
Inflation is something we should be concerned about, but shouldn’t fear.
By investing prudently, we can help to counteract the pernicious effects of inflation and preserve the purchasing power of our money.
Invest in strong businesses
The key to beating inflation is to invest your money in strong companies.
These businesses have pricing power and can raise the prices of their goods and services above inflation.
As a shareholder of such businesses, you get to enjoy a steady rise in profits and cash flows over the inflation rate.
Some examples of companies with strong pricing power include technology giant Apple (NASDAQ: AAPL) and food and beverage operator Chipotle Mexican Grill (NYSE: CMG), or CMG.
Apple produces a range of high-quality products such as the iPhone and iMac that are in high demand, thereby allowing them to raise prices over the years without suffering a fall in sales.
CMG recently raised the prices of its take-out orders as food delivery companies in the US have also raised their fees in line with the surge in food delivery orders during the pandemic.
REITs that pay consistent dividends can also reward you with a return above inflation.
For instance, REITs such as Keppel DC REIT (SGX: AJBU) and Mapletree Industrial Trust (SGX: ME8U) provide a dividend yield of 4.2% and 5%, respectively.
There’s a bonus that comes when you invest in dividend-paying companies.
The good ones have managed to consistently grow their dividends way above the inflation rate.
Take coffee giant Starbucks (NASDAQ: SBUX) and rural lifestyle retailer Tractor Supply Company (NASDAQ: TSCO), for instance.
Starbucks has increased its dividends by 16.2% per year over the last five consecutive years, while Tractor Supply has increased its dividends by 17.7% per year over the same period.
By owning such businesses, you get to enjoy the best of both worlds, a steady flow of passive income, and an income stream that increases much faster than the inflation rate.
Get Smart: Invest now to beat inflation
Inflation may be here to stay, but it should not be perceived as something bad.
Companies that have pricing power can thrive when inflation goes higher as they can justify price increases, thereby generating higher levels of profit.
As an investor, you should commit to an investment plan as soon as possible to combat the effects of inflation.
Dividend-paying stocks, REITs and strong blue-chip businesses can help you grow your portfolio such that you need not worry about inflation any longer.
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Disclaimer: Royston Yang owns shares of Starbucks, Apple and Tractor Supply Company.