The Fight Against Inflation

The latest news in the fight against inflation comes from China raising bank reserve ratio requirements yet again, the second time in 2 months.  Here in Singapore, we see the FY2011 Budget offering some help to low-income households to counter the effects of inflation.

Yet, nothing fundamental has been addressed by such measures.  Both in China and in Singapore, as is the case in most other countries, real interest rates are still negative.  And as long as real rates are negative, inflation will continue to ravage the poor as investors pile into hard assets in a bid to preserve their purchasing power while speculators add fuel to the fire by going along with the ride.

On the other hand, raising rates aggressively will kill the speculative bubbles in real estate in both countries, causing a lot of pain.  So policy makers in both countries are in a difficult position, although I would argue that it is better to pop a bubble sooner rather than later, because the consequences of delayed action will mean a much bigger clean-up cost down the road.  Politically, China is unlikely to act aggressively to tame inflation (unless there is social unrest), as I suspect Hu Jintao will want to pass the hot potato to Xi Jinping next year.  I don't know what the PAP government here is thinking.

With this reality in mind, it is important for us to look carefully at different ways to hedge against inflation.  As I have previously mentioned, one way to hedge is to store food by buying extra quantities when supermarkets have mark-downs for items that one consumes regularly.  If the price of a food item is growing at an annual rate of say 5%, this means that buying that item on the cheap will yield a 'return' of 5%.  How many investments are there that have such yields?

As for other investments, I shall refrain from commenting at this point in time because I feel that the markets are currently at a critical juncture and are sending out very confusing signals.  Given the divergences in the markets, it takes only 1 negative event to spark sharp sell-off.  As such, caution is advised.