Surging oil prices have sparked fears of an inflation comeback. We provide a guide to what causes inflation, how it could be managed, and what different inflationary environments mean for you and your money.
Summary:
- Inflation can be driven by supply or demand factors. Too much or too little are both bad for the economy.
- Central banks typically hike interest rates to tame inflation. Export-exposed countries, like Singapore, can do this through the exchange rate.
- Markets expect current oil supply shock to be temporary, with corresponding slowing demand eventually bringing prices – and interest rates – down.
- Market dislocations an opportunity for disciplined investors: higher income, undervalued assets. Keep dollar cost averaging.
- Back to Basics: What is inflation?
Inflation describes the rise in prices across an economy. Its most obvious impact is the erosion of purchasing power: $100 today buys less than $100 a decade ago. A few factors could lead to inflation:
- Demand: Economy booms, consumers spend more, leading to price rises.
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