We often share about how gold is a good inflation hedge, but do you know what exactly inflation means and how it affects your money?
Let’s take a look…
In early 2000, a single curry puff was sold for around RM0.40. Today, your standard curry puffs from a tepi jalan stall can easily cost between RM0.80 to RM1.00.
That is the result of inflation.
What is inflation
Inflation is the general increase in the prices of goods and services which ultimately leads to a decrease in your purchasing power.
What this means is that everything will gradually continue to become more expensive; in other words, your RM10 in savings will afford you fewer things in the long-term.
Why does inflation happen?
Many factors influence the gradual increase in prices every year.
Without going into a lengthy economic lesson, here are some simple reasons as to why inflation occurs:
1. The increase in production costs
When the costs to make goods or operate services rises, businesses may pass this cost onto consumers (you) by selling their products at higher prices.
Production costs include the price of materials used to make goods. For example, if the price of plastic suddenly drastically increased, companies may have customers bear the cost by increasing the prices of their plastic products; this is applicable across all industries that produce plastic goods.
2. Rising salaries
In a growing economy, it is common for skilled labourers and specialists to demand higher salaries. Higher salaries equal higher production costs for companies.
Again, companies offset this cost by increasing the prices of their products or services to their customers.
A shortage of labour can also occur for multiple reasons and companies will often offer higher wages to qualified workers in order to maintain production. This can happen when skilled specialists leave the country for better opportunities (also called a ‘brain drain’), leaving employee gaps in industries.
3. Natural disasters & geopolitical crises
Disasters such as floods and landslides can wipe out crops and destroy factories. This can result in a deficit of raw materials leading to an increase in production costs.
A sudden change in government, policies or conflict can often drastically affect labour. For example, armed conflict in a region can cause many skilled labourers to be displaced. Companies may need to raise wages to attract qualified candidates to stay, increasing overall production costs for the company.
4. High demand for goods
All the reasons listed so far are considered ‘cost-pull inflation’, which means they are cost-driving agents of inflation.
However, inflation can also occur when there’s a high demand for a product or service. When manufacturers are unable to match the supply of goods to the high demand, they will increase the prices of their goods and services.
For example, amid fears of COVID 19, many consumers rushed to stores and cleared out both face masks and hand sanitizers. Manufacturers who were unable to meet the overnight demand naturally increased their prices. As a result, retailers may increase the price of masks and sanitizers, affecting the costs for consumers.
Your purchasing power decreases in value every year
Inflation is unavoidable. As long as we continue to buy goods and services, prices will continue to increase.
So even if you actively save your money monthly, it will eventually be worth less in the future.
Say you have RM10,000 in savings: with the average Malaysian inflation rate of 3%, your RM10,000 will have the same purchasing power of RM7,440.94, 10 years from today.
What can I do to protect my money from losing value?
Grow your money through investments. Ideally, you would want to put your money into investments that have a higher return rate than inflation.
Grow your money with gold
Gold is a proven and reliable hedge against inflation.
From 2000-2019, gold has grown by an average of 8.91% annually (MYR), outpacing the average rate of inflation in Malaysia (3%). This is why many fund managers and wealthy investors keep a portion of their investments with gold.
Historically, gold prices tend to perform better than national currencies on the whole, especially when fiat currency drops in value.
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Many Malaysians look to HelloGold because it offers an easy way to grow your money with gold, right from your mobile phone.
With our award-winning gold savings app, you don’t need to be a financial expert to start protecting your money from inflation.
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